Expect big projects to be postponed as UK’s construction sector faces headwinds
Despite another improvement, the S&P Global Construction Purchasing Managers’ Index (PMI) still pointed to falling activity in June as businesses continue to report limited opportunities for new work.
However, as seen in other parts of the economy, a deterioration in sentiment rather than output likely explains some of the reported weakness in the construction sector.
This is the view of Matt Swannell, Chief Economic Advisor to the EY ITEM Club, who notes that even if the PMI readings are too pessimistic, the construction sector does face a difficult economic backdrop with signs that the economy is slowing.
US tariffs, tight fiscal policy, and some households still refinancing their mortgages to higher interest rates will all act as a break on growth across the second half of this year, he said.
“The construction PMI pointed to a marginal fall in activity, recording 48.8 in June. The reading marked an improvement from May when the survey scored 47.9, and is the highest reading since the PMI fell into contractionary territory in January.”
“The improvement was driven by residential house building, with commercial and civil engineering still declining during the month. Businesses continued to report a very challenging operating environment with intense competition to win new work in the face of heightened economic uncertainty,” he said.
Swannell noted that recent PMI readings appear to have been overly pessimistic and have probably been reflective of a shift in business sentiment rather than activity.
“It’s eye-catching that the survey has been in negative territory over the course of this year, but official estimates suggest construction activity has increased this year-to-date. However, it remains clear that the sector will face several headwinds over the coming quarters.”
“Economic uncertainty is likely to persist, and some major projects could be postponed, while ongoing labour shortages combined with the higher National Insurance Contributions (NICs) and National Living Wage will see cost pressures sustained.”
Swannell noted that the wider economy has started this year strongly, but the signs are there that momentum is already starting to fade, even if business surveys are too pessimistic.
“The imposition of US tariffs has reduced the UK’s access to its key trading partner, and combined with the lagged effect of past interest rate rises and tightening fiscal policy, we expect growth to be muted this year and into next,” he said.
