Construction sector rebound overshadowed by mounting gloom over outlook

Britain’s construction sector saw a return to growth in September but new figures also revealed gathering gloom amid rising interest rates, soaring costs and the threat of recession.

The latest S&P Global/CIPS construction purchasing managers’ index (PMI) revealed that business optimism fell to its lowest since July 2020 – at the height of the pandemic – and the sector saw its worst month for new orders for almost two-and-a-half years.

The more pessimistic outlook took the shine off news of the first growth in activity across the sector since June as supply chain woes eased and delayed projects got the go-ahead.

The report showed a reading of 52.3 in September, up from 49.2 in August.

A reading above 50 indicates growth.

It follows similarly downbeat PMI survey reports for the manufacturing and services sectors in recent days as the cost-of-living crisis takes its toll across the economy.

Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey, said: “UK construction companies experienced a modest increase in business activity during September, but the return to growth was fuelled by delayed projects and easing supply shortages rather than a flurry of new orders.”

He added: “Forward-looking survey indicators took another turn for the worse in September, with new business volumes stalling and output growth expectations for the year ahead now the lowest since July 2020.

“This reflected deepening concerns across the construction sector that rising interest rates, the energy crisis and UK recession risks are all set to dampen client demand in the coming months.”

A boost in housebuilding activity to a five-month high was largely behind the growth in the wider construction sector, according to the survey.

Construction firms also reported that supply shortages eased markedly in September, with delivery delays the least widespread since February 2020.

Samuel Tombs at Pantheon Macroeconomics said the construction figures showed the “calm before the storm”.

He said underlying demand had “flatlined… and surely will fall quickly soon, as both households and businesses retrench in the face of much higher interest rates”.

He added: “Meanwhile, the Government’s search for spending cuts likely will result in planned increases in public sector gross investment over the coming years being scrapped; political opposition to investment cuts likely will be weaker than to reductions in welfare spending.

“Accordingly, we doubt that the construction sector will avoid going into a recession next year; we now look for a 3% year-over-year decline in output in 2023.”