“Fragile client confidence and elevated borrowing costs.” Impacts on Construction

UK construction activity fell for the second consecutive month in October, while housebuilding fell for the 11th month in a row, according to the S&P Global/CIPS UK Construction Purchasing Managers’ Index.

Building work hit 45.6 in October, with a mark above 50.0 indicating growth. This figure was up slightly from the 45.0 mark in September, but was still the second-lowest reading since May 2020.  

The survey says firms reported “a lack of new work to replace completed projects” as well as “fragile client confidence and elevated borrowing costs.”  

Housebuilding in October fell at “a much steeper pace than elsewhere in the construction sector, hitting a mark of 38.5.

“Falling work on residential construction projects was widely linked to a lack of demand and subsequent cutbacks to new projects,” says the study.  

Civil engineering activity was also down sharply in October to 43.7, although there were “signs of stabilisation” in the commercial building sector with activity falling only marginally and at a slower pace than in September to 49.5.  

These declines across the industry happened as “improving supply conditions and falling demand contributed to a renewed decline in purchasing prices”.  

The latest decline in input costs was the steepest since August 2009, the report says.  

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

Around 37% of firms surveyed forecast a rise in business activity during the year ahead, while 19% predict a decline.   

The degree of optimism shown by firms was the lowest so far this year.  

Chief economist at the Chartered Institute of Procurement & Supply Dr John Glen says: “High interest rates and low consumer demand for new homes continue to drag down the UK construction sector, with a lack of new tender opportunities and a cutback of existing projects being reported across the housebuilding industry.”  

Beard Construction finance director Fraser Johns points out:

“Despite a stabilisation of commercial building, the headlines will be the eleventh straight monthly fall in housebuilding which is having a major impact in skewing overall activity and the wider industry picture. 

“Despite the positive news of the Bank of England holding rates, elevated borrowing costs and tighter access to credit remains a clear challenge.

Johns adds: “There’s no question though that it will be a tough end to the year for UK construction and for many firms, with some smaller firms potentially not making it that far amid a growing number of insolvencies.”

EY ITEM Club chief economic advisor Martin Beck says

“October was only the second month since January to see all three PMIs – construction, manufacturing and services — in contractionary territory. 

“However, all three indices were also a little higher than in September, suggesting that a loss of momentum in the economy has levelled out.

Beck adds: “Another quarter of growth bumping along the bottom is likely. And the odds of construction activity bouncing back in the near term look small. 

“Tight credit conditions, depressed sentiment, high debt costs, inadequate risk premia, and a sluggish economy will all weigh on activity. And a revival next year will likely struggle, given the extent to which interest rates have risen.”

Source: Mortgage Strategy