UK building activity has contracted at the sharpest pace since the depths of the pandemic, in a blow to the Labour government’s ambition to stimulate the economy by getting more cranes in the sky.
S&P Global’s construction PMI declined to 44.6 in February, down from 48.1 in January and below the 50 threshold indicating a contraction. The reading was significantly worse than the 49.5 expected by economists.
Output fell across all sectors, with residential property suffering the worst decline. Housebuilders blamed high borrowing costs and weak demand for a fifth consecutive decline in activity.
The numbers will be a sobering read for the Labour government ,which promised to build 1.5 million homes over the next five years. Achieving the target requires building at a pace not seen in decades, but housebuilders are under pressure from high mortgage rates and cost increases, on top of the UK’s complex planning rules.
A separate Bank of England poll of chief financial officers showed the economy facing a growing risk of stagflation as firms react to the big payroll tax hike announced in the budget in October and a worsening global outlook.
Businesses expect to raise their own prices by 4% over the next 12 months, the highest reading since April last year, and see wage growth staying elevated at levels that are likely to keep the BOE cautious about the pace of further rate cuts. At the same time, employment is expected to remain flat.
See also: Bank of England gives hawkish warning as it cuts rates to 4.5%
The Decision Maker Panel survey was carried out between Feb 7 and Feb 21, after the BOE cut interest rates by a quarter-point to 4.5%. Firms anticipate two more reductions to 4% over the next 12 months, but expect their own cost of borrowing to remain high at above 6%.
Builders cut staff numbers in February at the fastest pace since November 2020, shedding jobs for a second month. The PMI report revealed firms are cutting back investment plans as clients delay decisions and the economic outlook becomes more uncertain, while price pressures on everything from raw materials to energy and wages intensified.
“Survey respondents widely cited a lack of new work in the house building segment, due to soft market conditions and the impact of elevated borrowing costs,” said Tim Moore, economics director at S&P Global Market Intelligence. “There were also signs that rising payroll costs and purchasing prices have become a source of anxiety.”
See also: London rents rise at slowest pace since 2021
A payroll tax called national insurance contributions will rise in April, as part of Chancellor of the Exchequer Rachel Reeves’ attempts to balance the books. Earlier this week, Reeves warned the UK could be hit by rising prices and weaker growth even if US President Donald Trump’s tariffs are not aimed directly at Britain.
Builders have a less optimistic outlook than in 2024 amid feeble consumer confidence and more risk-averse clients, the PMI survey said.
