Steep falls in housebuilding drive contraction in UK construction

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UK construction activity contracted in October, according to a data published on Monday, driven by the 11th consecutive monthly fall in housebuilding on the back of higher borrowing costs.

The S&P Global/Cips UK construction purchasing managers’ index rose slightly to 45.6 last month from 45 in September but remained below the 50 point mark, indicating that most businesses reported a contraction.

The reading, the second lowest since May 2020, was driven by a sharp contraction in housebuilding, which stood at 38.5. It also provides further evidence of the slowdown in demand sparked by higher interest rates.

Since November 2021, the Bank of England has raised rates from a record low of 0.1 per cent to 5.25 per cent in a push to bring inflation back to its 2 per cent target. As a result, activity in sectors that are sensitive to higher rates, such as housing, has weakened sharply.

Tim Moore, of S&P Global, said the survey’s results showed the impact of “elevated borrowing costs and a wait-and-see approach to new projects”.

Data last month from the Office for National Statistics, showed that construction output contracted in July and August, and Monday’s PMIs suggest the downturn has continued.

Thomas Pugh, economist at consulting group RSM UK, said: “The economy probably contracted in Q3 and, at face value, the PMIs are pointing to another contraction in Q4, which would mark the start of a recession.”

The latest S&P Global/Cips survey showed that new work in the construction sector fell for the third successive month in October, and that the rate of contraction was the joint sharpest since May 2020.

Many survey respondents reported a lack of tender opportunities and lengthier decision making among clients amid concerns about the broader economic outlook. The data for October also pointed to a slowdown in job creation to its weakest since June.

John Glen, Cips chief economist, said: “High interest rates and low consumer demand for new homes continue to drag down the UK construction sector, with a lack of new tender opportunities and a cutback of existing projects.”

In a sign that higher borrowing costs are having the effect the BoE intends, survey respondents also reported lower price pressure in October. Input prices in the sector fell at the fastest rate since August 2009, while the rates charged by subcontractors declined for the first time since July 2020.

Glen said that while suppliers were previously able to lift prices in response to soaring demand, “falling construction activity has now tilted the negotiations in favour of buyers and suppliers are having to pass on lower prices for raw materials like timber and steel”.

As demand has fallen, supply-side constraints have also continued to ease, with improved subcontractor availability and shortened suppliers’ delivery times.

Civil engineering activity was the second-worst performing sector, with a reading of 43.7, indicating the fastest rate of decline since July 2022.

Commercial building, meanwhile, showed signs of stabilisation, rising to 49.5 in October from 47.7 in September, indicating only a marginal fall in activity.