UK construction sector slips into contraction territory in June

(Alliance News) - Driven by a worsening decline in residential work, activity in the UK construction sector fell in June from May, hitting a five-month low, a survey showed on Thursday.

The S&P Global/CIPS UK construction purchasing managers' index fell to 48.9 points in June from 51.6 in May. Falling below the 50-point no-change mark, the survey reading shows the sector has fallen into contraction territory.

June's reading was lower than FXStreet-cited market consensus of 50.9 points.

"UK construction companies signalled a renewed decline in business activity during June as a steep and accelerated downturn in house building weighed on overall workloads," S&P Global said.

Matthew Pointon and Andrew Wishart, senior property economist at Capital Economics, said they had expected the recovery in construction activity to "peter out".

"After all, stubbornly high inflation has led to a resurgence in gilt yields and interest rates are now set to be higher for longer. Not only is that likely to lead to further falls in commercial capital values, but it will also lead to a mild recession later this year. That sort of environment is not conducive to construction," the analysts said.

The decline in the construction sector was due to a sharp deterioration in residential work, which the sub-index falling to 39.6.

"Aside from the lockdown-related fall in house building, the rate of contraction was the fastest since April 2009. Survey respondents widely commented on weaker demand due to rising borrowing costs and a subdued outlook for the housing market," S&P Global commented.

Civil engineering was the best-performing area of construction, with a sub-index reading of 53.1 points, amid increasing work on infrastructure projects.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said June's construction PMI suggests that interest rates now have risen far enough to push the sector into a renewed downturn.

"We also continue to think that the construction sector probably is struggling to a greater extent than implied by S&P's survey, given that it doesn't tend to reflect changes in repair and maintenance work," Tombs continued.

"Accordingly, we continue to think that [gross domestic product] merely held steady in [the second quarter of 2023], falling short of the 0.3% quarter-on-quarter growth rate implied by the composite PMI, which excludes the construction sector."

On Wednesday, S&P Global said the UK composite PMI, which measures the services and manufacturing sectors together, fell to 52.8 points in June from 54.0 in May.

At the end of June, the Office for National Statistics had confirmed UK GDP grew by 0.1% in the first three months of 2023 from the final quarter of last year. GDP also had grown by 0.1% in the fourth quarter of 2022 from the third.

The UK construction PMI is compiled by S&P Global from responses to surveys sent to 150 construction companies, with data collected between June 12 and 29.

By Heather Rydings, Alliance News senior economics reporter

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