Construction output falls for the first time in five months: PMI survey

Construction output has fallen for the first time in five months, amidst the continued steep downturn in housing activity, the latest PMI index of the construction sector from S&P Global shows.

UK construction companies signalled a renewed decline in business activity during June as a steep and accelerated downturn in house building weighed on overall workloads.

Latest data also highlighted a reduction in new orders for the first time since January. 

At 48.9 in June, down from 51.6 in May, the headline seasonally adjusted S&P Global / CIPS UK Construction Purchasing Managers’ Index® (PMI®) – registered below the neutral 50.0 threshold for the first time in five months.

However, on a more positive note, softer demand and fewer supply bottlenecks resulted in the sharpest improvement in delivery times for costruction inputs since July 2009.

Solid rates of output growth in the commercial and civil engineering segments and "robust infrastructure workloads" also helped to offset some of the weakness in residential construction (index at 39.6), according to Tim Moore, economics director at S&P global market intelligence, which compiles the survey.

He conceded weaker housing market conditions in the wake of higher borrowing costs acted as a major constraint on UK construction output in June and total industry activity declined for the first time in five months due to the steepest downturn in residential work since May 2020. 

Aside from the lockdown-related fall in house building, the rate of decline was the fastest for just over 14 years, Moore said. 

"Survey respondents widely commented on cutbacks to new residential building projects and more caution among clients in response to rising interest rates," he added.

"Solid rates of output growth in the commercial and civil engineering segments helped to offset some of the weakness in residential construction. 

"Higher levels of business activity were attributed to resilient demand for refurbishment projects in the commercial construction sector and robust infrastructure workloads."

He added construction companies experienced an outright decline in their purchasing prices during June, which contrasted with the rapid rates of cost inflation seen over the past three years. 

"Anecdotal evidence suggested that more competitive market conditions and improved materials availability had helped to bring down inflationary pressures," said Moore.

"Supply constraints continued to ease in the latest survey period, as signalled by the fastest improvement in delivery times for construction inputs since July 2009."

Dr John Glen, Chief Economist at the Chartered Institute of Procurement & Supply (CIPS), said the construction sector became rooted in contraction territory in June, as interest rate rises and squeezed affordability rates impacted on residential building output, "which fell to its greatest extent since 2009 outside the pandemic years".

"Fewer houses being built meant the sector was dragged down overall because civil engineering and commercial building projects remained relatively buoyant with stronger pipelines of work," Glen said. 

"Delivery times for building materials were also the most improved since 2009. 

"Input price inflation fell blow the no-change mark, meaning raw materials became less expensive and were more widely available for construction companies."

However, he added that looking ahead, there were few reasons to be cheerful as optimism fell to its lowest since January. 

"A large blot on the landscape was the fall in employment growth," Glen said. 

"With interest rates at the highest for 15 years and inflation four times over the Bank of England target, the sudden reduction in construction sector hiring is one of the red flags facing the UK economy at the moment."

Civil engineering was the best-performing segment (index at 53.1), with business activity rising at the second-fastest pace since June 2022.

Construction companies mostly noted increasing work on infrastructure projects.

Commercial building also expanded at a solid pace in June (index at 53.0), although the rate of growth slipped to a three-month low.

Rising demand for refurbishment projects was cited in June, but some firms reported more cautious decision-making by clients.