Construction PMI: Drop in housebuilding ‘will chill spine’ of UK economy

The pace of housebuilding declined last month to its lowest level since the first Covid locking down three years earlier.

According to the latest Construction Purchasing Managers’ Index from S&P Global & the Chartered Institute of Procurement & Supply, the property market has been weakened since last fall by a combination of rising mortgage rates and a cost of life crunch. Developers are now building fewer homes.

The number of residential construction projects dropped for the sixth consecutive month in May. Activity in housebuilding industry fell to 42,7. This is the lowest number in over 14 years, excluding the pandemic. Anything below 50 is a contraction.

John Glen, the chief economist of the Institute, stated that the decline in residential construction, which is a major employer across Britain, will “send a chill through the spine” of the UK’s economy.

Kelly Boorman is the head of construction for RSM UK. She said that the recent fall in the housebuilding industry “doesn’t come as a shock” and with more rate increases expected there are further headwinds for builders who “pull back on projects to preserve their margins”.

To preserve cash and build only what could be sold, all the major housebuilders responded to the sharp drop in demand that occurred at the end of the last year by reducing their construction rates.

The PMI survey revealed that despite the decline in residential construction, total construction activity had increased to 51.6 in Britain in May. This was an increase from the 51.1 reading in April, and slightly better than economists’ expectations of 51.5. For four consecutive months, the overall figure was above 50, the mark between expansion and contraction.

The improvement was driven by an increase in civil engineering and commercial construction activity. Companies in these subsectors pointed to a “gradual turn-around in confidence” from clients who were beginning to make more decisions.

Despite the disappointing performance of housebuilders, construction companies continue to gain new business. The overall increase in their order book is at its highest level for over a year.

Tim Moore, director of economics at S&P Global Market Intelligence (which compiles this survey), said that the data for May showed a mixed picture in the UK construction industry. “Stable growth rates in civil and commercial engineering activity contrasted sharply with the decline in housebuilding,” Moore stated. The fastest increase in new orders was driven by the increasing demand from corporate clients, and contracts awarded on infrastructure projects.

In recent years, the cost of labour and materials has been a major factor in the construction industry. However, both factors “improved significantly” last month. The lead times for materials delivery have decreased at the fastest pace since August 2009. Prices inflation has also dropped to its lowest level in two and a quarter years. The respondents suggested that suppliers were competing for business in the face of a softer demand, as construction firms ran down their excess stock.

The industry is generally optimistic about the growth prospects of the next year, but optimism has waned a bit. The survey found that 45 percent of the companies surveyed expected to see their production increase in the coming year. However, this was a drop from the previous month’s positive sentiment.

The companies cited the concerns over the health of their domestic economy as well as the impact of increasing interest rates as two of the “main factors” that were holding back their growth projections.

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