Housing drags down construction sector in March

According to the latest CIPS data, the headline UK Construction Purchasing Managers’ Index (PMI) fell to 50.7 in March, down from 54.6 in February.

House building was the weakest performing area at 44.2 (down from 47.4 last month) recording the fastest decline in housing activity since May 2020.

Civil engineering boosted the sector showing the fastest rise in business activity (at 52.0) with infrastructure projects contributing to growth. Commercial building work also rose (at 51.1), although the rate of expansion eased from February’s nine-month high.

Commenting on the data, Kelly Boorman, Partner and National Head of Construction at RSM said “These figures are a reminder that, despite the economy showing signs of resilience, the construction sector continues to operate in a very tough commercial environment. Housing activity saw a significant decline in activity this month as homeowners’ confidence falls further around mortgage rates and availability, and the housebuilders tussle with housing targets and a fall in demand in some areas of the UK.”

“Last month was the wettest March in over 40 years so the sector will be playing catch up on delays thanks to the bad weather. The performance of the housebuilding sector impacts areas such as infrastructure projects in towns and cities which will have a bearing on investment and spending decisions in the sector.”

“Tensions in supply chains, increased litigation, squeezed margins and challenges with labour availability, along with high number of insolvencies in the sector, create concern for delivery of major projects and sustainability for many businesses.”

“Businesses continue to challenge “fixed term” contract pricing and are being more selective about project procurement, looking to preserve margins and de-risk their contracts. With material prices stabilising, optimism around inflation and interest rates many businesses will see a tough trading period with reduced activity during 2023. However, they will likely achieve better margins and less volatility in the supply chains as the insolvencies level out.”

Thomas Pugh, Economist at RSM UK, said “The drop in the IHS/Markit Construction PMI to 50.7 was probably mainly driven by the exceptionally wet weather in March. But it also illustrates the impact that higher interest rates are having on the construction sector. Housing activity has been hit especially hard as higher interest rates raise the possibility that house prices will continue to fall. Indeed, there is clear evidence of a significant slowdown in the housing market. The Nationwide house price index has fallen by 3.1% y/y and approvals for house purchases, an indicator of future borrowing, have stabilised around half their August peak.

“Given interest rates may rise even further and the economy will remain weak, even if a technical recession is avoided, output in the construction industry is likely to fall further this year. We expect GDP as a whole to fall by about 0.1% q/q in Q1 and Q2 2023 and for the economy to be roughly the same size in 2024 as it was in 2019.”

“However, there is some cause for optimism. Supply conditions have undoubtedly improved and the input prices and sub-contractors’ rates have stabilised, indicating that pricing pressure is becoming less extreme. This chimes with our view that inflation will rapidly drop over the course of this year, easing the cost-of-living crisis and setting the stage for a rebound in growth in 2024.”