Construction output continues to decline at a sharp pace, says PMI report

Construction activity fell for the second month running in October with house building declining for the 11th successive month, according to the latest PMI report. 

Challenging business conditions persisted last month amid a lack of new work to replace completed projects. 

Fragile client confidence and elevated borrowing costs were cited as reasons for weaker sales.

The S&P Global/CIPS UK Construction Purchasing Managers’ Index® (PMI®) - which measures month-on-month changes in total industry activity – was 45.6 in October. 

This was up slightly from 45.0 in September, but below the neutral 50.0 value and still the second-lowest reading since May 2020, signalling a marked decline in total construction activity. 

House building decreased for the 11th month in a row in October and at a much steeper pace than elsewhere in the construction sector (index at 38.5). 

Falling work on residential construction projects was widely linked to a lack of demand and subsequent cutbacks to new projects.

Civil engineering activity also decreased sharply in October (index at 43.7) and the rate of decline was the fastest since July 2022. 

Meanwhile, there were signs of stabilisation in the commercial; building segment, with activity falling only marginally and at a slower pace than in September (index at 49.5).

Total new work fell for the third month running in October and the rate of contraction was the joint-sharpest since May 2020. 

Survey respondents widely commented on a lack of tender opportunities and lengthier decision-making among clients due to concerns about the broader economic outlook.

Worries about shrinking pipelines of construction work contributed to a moderation in business confidence for the third successive month in October. 

Around 37% of the survey panel forecast a rise in business activity during the year ahead, while 19% predicted a decline. 

The degree of optimism signalled by the survey in October was the lowest so far this year. 

A number of firms commented on particular weakness in the house building sector and an ongoing headwind from higher interest rates.

October data also pointed to a slowdown in job creation to its weakest since June, alongside another decline in purchasing activity, which mostly reflected a downturn in forthcoming projects starts.

Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey, said: “October data highlighted another solid reduction in UK construction output as elevated borrowing costs and a wait-and-see approach to new projects weighed on activity. 

"House building decreased for the eleventh month running and once again saw a much steeper downturn than other parts of the construction sector. 

“There were signs of stabilisation in the commercial building segment, however, with output falling only slightly since September.”

Brian Smith, head of cost management and commercial at AECOM, added: “Another month of activity below the 50-point mark suggests contractors are expecting a difficult winter ahead. 

“Housebuilding continues to be a drag on industry output which, given its size, the other sectors are seemingly no longer able to make up for.

“Our data suggests the rate tender price inflation and material costs have eased to lower levels, but wages continue to rise at around 5%. Many firms have also yet to fully refinance their operations at new interest rates which will undoubtedly put pressure on working capital.

“Contractors looking to build their order books will find some solace in targeting retrofit and decarbonisation work but, more broadly, we would anticipate project starts and new orders remaining underwhelming into the new year.”

Data was collected 12-30 October 2023.