Higher rates weighing more clearly on UK construction in November

(Alliance News) - The UK construction sector saw higher interest rates "more clearly" weigh on its activity in November, according to analysts responding to the latest purchasing managers' index numbers.

The latest S&P Global/Chartered Institute of Procurement & Supply UK construction purchasing managers' index fell fractionally to 45.5 points in November, from 45.6 in October. Slipping further behind the 50.0 no change mark, the latest reading suggests the sector's decline picked up pace slightly.

"UK construction companies indicated a decline in business activity for the third consecutive month during November, led by another sharp fall in residential building. Elevated borrowing costs and subdued demand for new housing projects were widely cited as factors holding back construction activity," survey publisher S&P Global said.

"Latest survey data pointed to the steepest reduction in purchasing costs across the construction sector for more than 14 years. This was linked to lower raw material prices, alongside greater competition among suppliers in response to falling demand for construction inputs."

Housebuilding was the worst-performing sub-sector, and "by far", S&P Global said. There was "resilience" in commercial building, though it remained n downturn territory and has been for three months on-the-trot.

Pantheon Macroeconomics said higher interest rates particularly hit UK construction in November, "now that builders have depleted the backlog of projects that accumulated in 2021 and 2022".

Capital Economics concurred, saying it expects this weakness to continue "as the impact of high interest rates continues to pass through".

Pantheon Macroeconomics also noted housebuilding remained the worst-performing subsector, with the balance remaining "well below" its average since 1997 of 53.5, despite ticking up 39.2 in November from 38.5 in October.

"At the same time, the recent decline in commercial activity appeared to gather pace, with the relevant balance falling to 48.1, from 49.5. Meanwhile, the civil engineering activity balance deteriorated too, falling to a 16-month low of 43.5, from 43.7 in October," said Pantheon Macroeconomics analyst Gabriella Dickens.

Capital Economics analyst Giulia Bellicoso commented: "Given we think that overall transaction volumes will remain weak until late 2024, we forecast another 20% drop in housing starts from 142,000 in 2023 to 107,000 in 2024. That compares to an average of 160,000 in the years leading up to the pandemic.

"Meanwhile the fall in the commercial balance, from 49.5 in October to 48.1 in November, chimes with our view that commercial construction activity is set to slow. Admittedly, the picture painted by the forward-looking indicators is slightly more upbeat, with the new orders balance increasing to 45.2. But despite that slight improvement it is still one of the lowest readings since the onset of the pandemic, suggesting that demand is contracting."

Looking ahead, Pantheon Macroeconomics' Dickens said activity "looks set to remain in the doldrums in the near term", as the new orders balance remained well below the 50.0 mark and business sentiment "still was well below historic norms", despite increasing to 62.2 from 58.9.

"At least the continued easing of supply-side constraints should help construction firms and attenuate cost pressures. Note that the input prices balance fell to 42.6 in November—its lowest level since mid-2009—from 44.5 in October, while the rates charged by sub-contractors rose only modestly. Demand should also firm up next year," said Dickens.

"Granted, the [UK] Chancellor [Jeremy Hunt] set out plans in the Autumn Statement for real public sector gross investment to fall by 0.6% year-over-year in 2024/25. But if [consumer price] inflation falls back to below 3% by [the second quarter], as we expect, the [Bank of England Monetary Policy Committee] will be able to start reducing bank rate; we have pencilled in 75 [basis points] of cuts next year, 25 [basis points] each quarter from [the second quarter]. This drop in borrowing costs should enable construction activity to pick up, with projects that previously were not profitable given the go ahead."

Last month, the BoE maintained interest rates at a 15-year high of 5.25%, a second-consecutive hold following one in September and ending a streak of 14 successive hikes since December 2021. The BoE had rapidly shot up the bank rate from a Covid-19-induced low of 0.10%.

Capital Economics' Bellicoso summarised: "Despite lower prices, we expect construction activity to remain weak in the near term. High financing costs and uncertainty over capital values, alongside the fact that we expect the economy to stay weak throughout 2024, will act to keep new development subdued over the coming months."

The S&P Global/Chartered Institute of Procurement & Supply UK survey features a panel of around 150 construction firms. Responses were collected between November 9 and 29.

By Greg Rosenvinge, Alliance News senior reporter

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