House building slump weighs on construction output, says PMI report

A sharp fall in residential building led construction activity to fall for the third consecutive month in November, according to the latest PMI report.

Elevated borrowing costs and subdued demand for new housing projects were widely cited as factors holding back construction activity.

Latest survey data pointed to the steepest reduction in purchasing costs across the construction sector for more than 14 years. 

This was linked to lower raw material prices, alongside greater competition among suppliers in response to falling demand for construction inputs.

The S&P Global/CIPS UK Construction Purchasing Managers’ Index® (PMI®) - which measures month-on-month changes in total industry activity – was 45.5 in November, down fractionally from 45.6 in October – and below the 50.0 no-change value for he third month running. 

The latest reading was the second-lowest since May 2020 and signalled a marked reduction in total industry activity.

November data illustrated that house building (index at 39.2) remained by far the weakest-performing segment, followed by civil engineering (43.5). 

Survey respondents cited cutbacks to residential development projects and a general slowdown in activity due to unfavourable market conditions.

Commercial building showed some resilience (index at 48.1), but activity in this category has now decreased for three months in a row.

Construction firms noted that lacklustre domestic economic conditions and delayed decision-making by clients on major investment spending had been factors limiting demand.

November data suggested a continued lack of new work to replace completed projects. 

Total new orders decreased for the fourth month running, albeit at the slowest pace since August.

Business activity expectations for the year ahead picked up from October's recent low but remained notably weaker than seen in the first half of 2023. 

Concerns about the near-term demand outlook contributed to a renewed decline in staffing numbers during November and a marked reduction in purchasing activity.

Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey said: “A slump in house building has cast a long shadow over the UK construction sector and there were signs of weakness spreading to civil engineering and commercial work during November. 

“Residential construction activity has now decreased in each of the past 12 months and the latest reduction was still among the fastest seen since the global financial crisis in 2009. 

“Elevated mortgage costs and unfavourable market conditions were widely cited as leading to cutbacks on house building projects.

"Rising interest rates and the uncertain UK economic outlook also hit commercial construction in November, while a lack of new work contributed to the fastest decline in civil engineering activity since July 2022.”

Brian Smith, head of cost management and commercial at AECOM, said: “The sector’s downturn continues for a fourth month running, with the current cold snap reminding us that we’re heading into the toughest part of the year for building. 

“Firms will have been looking to the recent Autumn Statement for measures to stoke the sector’s fires and drive infrastructure investment.

"But beyond the extension of full expensing, the interventions announced offered little to counter the impact of elevated interest rates on new project starts. 

“If contractors are to find fertile ground for growth in 2024, it will be in decarbonisation projects which remain a priority for local authorities and investors alike.”

Dr John Glen, chief economist at the Chartered Institute of Procurement & Supply (CIPS), added: “There is no doubt that 2023 has been a difficult year for the UK construction sector.

“Inflated borrowing costs and falling demand have conspired to further slow new building this month. 

“Despite this, the sector has finally emerged from a period of intense supply chain pressure and prices are now falling across the board, especially for timber and steel.

"Projects are no longer being delayed due to unexpectedly high material costs with November seeing the sharpest reduction in purchasing prices since July 2009. 

“There will be no quick fixes next year for the sector. Lower demand, elevated interest rates and the prospect of an election promise an uncertain start to 2024.

"This is a challenging moment for suppliers in the sector, who may have tough price negotiations ahead.”

Data was collected from November 9-29.