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UK construction activity posted its biggest monthly slide since May 2020 as a steep downturn in housebuilding led to a greater than expected fall in September, according to a closely watched survey.

The S&P Global/Cips UK construction purchasing managers’ index dropped to 45, down sharply from 50.8 in August and well below the 49.9 forecast by economists polled by Reuters.

A reading below 50 indicates that most businesses have reported that activity has contracted.

The data provided additional evidence that higher interest rates are weighing on demand in the UK economy as intended by the Bank of England in its fight against high inflation.

It comes as a separate survey published by the BoE on Thursday suggested that the labour market had continued to cool.

The BoE left its interest rate unchanged at 5.25 per cent in September after a series of rises. James Smith, economist at the bank ING, said the Thursday data would “bolster the case for another ‘on hold’ decision in November”.

Construction companies blamed the slowdown on “cutbacks to new residential development projects in the wake of sluggish demand and rising borrowing costs”, said Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey.

Businesses in the residential sector performed worst, with a reading of 38.1 — its steepest downturn since April 2009, apart from when the construction sector was shut down during the coronavirus pandemic.

Line chart of Purchasing managers' index, below 50 = a majority of businesses reporting a contraction showing UK posts its steepest decline in construction output since May 2020

Commercial and civil engineering activity also contracted in September, reversing the solid growth seen throughout the spring and summer. Builders noted that worries about the economic outlook had damped client demand.

The gloomy data comes the day after the government announced axing the HS2 rail project. Kelly Boorman, partner and national head of construction at RSM UK, said: “The scrapping of HS2 will undoubtedly derail the pipeline of future activity for many contractors and their supply chain.

“Coupled with the delay in mobilising new infrastructure projects not even announced by the government, this will put some businesses at risk and create further industry uncertainty,” she added.

The survey also showed that the jobs growth slowed in the sector to its weakest since June, while the use of subcontractors decreased for the first time since January.

Also on Thursday data from the BoE’s September Decision Maker Panel, a monthly survey of UK chief financial officers, showed that businesses expect inflation in the year ahead to be 4.9 per cent.

The figure was marginally up from the 4.8 per cent reported in August, but well below the recent peak of 9.5 per cent reached in September last year.

Companies also predicted that wages would increase by 5.2 per cent, up from 5 per cent in August, but down from 6.3 per cent in December 2022.

Tomasz Wieladek, economist at the investment company T Rowe Price, said the survey reflected the rise in prices at the petrol pump, which rose by 13 per cent since August.

He added that the moderate increase in inflation expectations suggests that the easing in underlying price pressures coming from weaker demand “more than offset a very large move in oil prices”.

The BoE data showed that businesses were finding it easier to recruit workers, with 55 per cent reporting that it was a little or much harder to find new employees, down from 57 per cent in the previous month and well below the 84 per cent they reported in the same month last year.

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