House building slump brings biggest construction output fall since 2020, says PMI data

The UK’s construction sector saw the biggest slide in activity for more than three years in September, according to the latest monthly PMI report.

The downturn was led by a “steep and accelerated” fall in house building which, aside from the pandemic, was the sharpest fall since April 2009. 

The S&P Global/CIPS UK Construction Purchasing Managers’ Index® (PMI®) - which measures month-on-month changes in total industry activity – registered 45.0 in September, down sharply from 50.8 in August and below the neutral 50.0 value for the first time since June.

Residential work (index at 38.1) was by far the worst performing area of construction output during September, followed by civil engineering activity (45.7). 

Survey respondents widely commented on cutbacks to house building projects amid rising borrowing costs and weak demand conditions.

Commercial building declined at only a modest pace in September (index at 47.7), but this represented a considerable setback after the solid growth seen throughout the summer.

Some firms noted that worries about the economic outlook had dampened client demand and led to a lack of new work to replace completed projects.

Total new business received by construction companies decreased for the third time in the past four months during September. 

Plus, the rate of decline was the steepest seen since May 2020. Construction companies typically cited sluggish demand conditions and a severe drag on new orders from reduced workloads in the residential building sector.

The overall rate of employment growth was the weakest since June and only modest overall and sub-contractor usage decreased for the first time since January. 

A lack of new projects resulted in the steepest rise in sub-contractor availability for more than 14 years. 

Purchasing activity decreased at a solid pace in September reflecting weaker order books and efforts to reduce inventories. 

Survey respondents noted higher fuel bills and some rises in raw material prices, but this was offset by lower shipping costs and greater price competition among suppliers. 

But the number of construction firms predicting a rise in output over the year ahead (41%) continued to exceed those forecasting a decline (17%). 

This was linked to long term business expansion plans and hopes of a turnaround in customer demand. 

However, the overall degree of confidence slipped to its lowest since December 2022 amid concerns about higher borrowing costs and weaker housing conditions. 

Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey, said: “Output levels declined across the UK construction sector for the first time in three months during September and the latest downturn marked the worst overall performance since the early stages of the pandemic. 

“A rapid decline in house building activity acted as a major drag on workloads, with construction companies widely commenting on cutbacks to new residential development projects in the wake of sluggish demand and rising borrowing costs. 

“Concerns about the domestic economic outlook also dampened client spending during September, which contributed to the fastest reduction in commercial building since January 2021.”

Dr John Glen, chief economist at the Chartered Institute of Procurement & Supply (CIPS), added: “The impact of high mortgage rates and low house buying demand continues to flow through the supply chain and negatively hit the UK construction industry. 

“It has been a tough year for residential construction and the sharp decline in September shows the pressure on the sector is still a long way from easing, despite the pause on the raising of interest rates. 

“After some positive signs over the summer months, September saw a bump back down to earth for commercial construction as concerns over the future of the economy hampered demand and delayed new projects. 

“There is some comfort in the fact that the days of disrupted supply chains and soaring inflation are behind us for the time being, with delivery times continuing to fall and input prices remaining stable. 

“The lack of activity has given space for suppliers to catch up with demand and create slack in the supply chain, which the construction sector will be hoping to take advantage of once demand returns.”

The latest PMI data comes just 24 hours after Prime Minister Rishi Sunak confirmed the northern leg of the HS2 project to Manchester would not go ahead. 

Max Jones, a director in Lloyds Bank’s infrastructure and construction team, said: “Yesterday’s announcement regarding the future of HS2, the biggest infrastructure project in the UK, will be of concern to many contractors that have developed long-term plans based on the opportunities this would bring. 

“Having said that, contractors are agile and will pivot to identify new opportunities from the £36bn which the government has identified for new transport projects in the North and Midlands.

“The construction sector lags the wider economy, so it faces a more challenging period as spending decisions from a few months ago filter through to pipelines. 

“There is also some attention on whether there will be some consolidation within the sector, as well a focus on decisions on recruitment and retention, as businesses adjust to the current economic environment and plan for 2024 and beyond.”

PMI data was collected from September 12-28.