Construction output continues its downward decline in August

Business activity in the UK construction sector fell for the eighth month in a row, according to the latest  Purchasing Managers’ Index (PMI) figures from S&P Global.

Despite the decline registering a slower pace than in July, business activity projections for the year ahead were the least optimistic since late 2022.

S&P Global’s headline PMI hit 45.5 in August, an increase from 44.3 in July, which was the lowest reading for just over five years. Any reading below 50 indicates a contraction and while there was a slight improvement on July’s figure, S&P said it was “indicative of another solid decline in overall construction output”.

The overall construction PMI number was dragged lower in August by steep declines in civil engineering (38.1) and residential (44.2) activity. At 47.8, commercial building provided a little support to the headline figure.

While total new orders slumped for the eighth month in a row, they did so at their shallowest rate of decline since January.

“There were some positive signals on the supply side as vendors’ delivery times shortened, subcontractor availability improved and purchasing price inflation hit a 10-month low,” said Tim Moore, Economics Director at S&P Global Market Intelligence. “However, easing supply conditions mostly reflected subdued demand and a lack of new projects.

“Elevated business uncertainty and worries about broader prospects for the UK economy meant that construction sector optimism weakened in August. The proportion of panel members expecting a rise in output over the year ahead was 34 per cent, down from 37 per cent in July and lower than at any time since December 2022.”

Brian Smith, head of cost management at Aecom, said in the current market conditions contractors need to “keep a tight grip on cashflow and costs” and be aware of the risks to their businesses should the economic environment deteriorate further. The government’s infrastructure plan and the £725bn of public money that backs it are key, he said.

“Unlocking projects, accelerating delivery and providing the certainty required for long-term planning will only be possible if the public and private sectors work in partnership to convert investment into tangible outcomes that reshape the UK’s economic and social landscape,” Smith added.

The benefits from that investment and those tangible outcomes will take time to filter through, said Huda As’ad, Accenture’s infrastructure and capital projects lead in the UK and Ireland. In the current uncertainty, he said the industry should “focus on making their supply chains more resilient by adopting modern building methods and digitising operations”.

“The construction sector has the opportunity to power the UK’s economic recovery, but it requires decisive action,” As’ad added.

Richard Green, construction partner at law firm Gowling WLG, agreed, saying that companies were adapting strategies and making efficiencies where they can in the current climate, “demonstrating a steadfast commitment to delivering vital projects”.

“Investors will be watching closely for signs of stability and renewed momentum as we head into the autumn months,” he added.

Meanwhile, data released by Glenigan today (4 September) showed the value of work starting onsite fell by 4 per cent in the three months to the end of August and was 6 per cent lower than the figure for the same period last year.

According to Glenigan, “persistent international socioeconomic pressures” and an erosion of investor and consumer confidence caused by “unpopular government policies” led to starts onsite falling 18 per cent in the residential sector in the three-month period to the end of August.

“The uptick in residential activity observed during the spring and summer, which drove the majority of the recent impressive growth, is starting to slow as autumn starts,” Glenigan said in its latest index report.

Overall, Glenigan economist Drilon Baca noted that while many contractors and subcontractors, especially in the residential sector, will be “deeply frustrated” at the evaporation of the summer optimism, the construction industry remains in a far stronger position than it was last winter.

“However, we need to be cautious,” he added. “There remains a high degree of uncertainty. In the lead-up to the widely-rumored Autumn Budget Statement, the sector will not be helped by persistent international pressures and, closer to home, ongoing speculation around property tax increases.”