UK Construction Sector Faces Sharpest Decline Since 2020 Lockdown

The UK construction sector experienced its most significant decline in activity since the first Covid lockdown in May 2020. A recent survey revealed that activity sharply decreased in November 2023, as projects were scaled back and jobs were cut amidst budget uncertainty. This downturn poses a significant challenge to the Labour Party’s plan to enhance infrastructure projects and construct 1.5 million homes by 2030.

The monthly purchasing managers’ index (PMI) for construction, a key indicator of growth in the sector, fell to 39.4 in November, down from 44.1 in October. This figure also fell short of the 44.6 forecast by economists. A PMI reading above 50 signifies growth, while a reading below that indicates contraction. The current numbers reflect a troubling trend, with the only comparable decline recorded during the financial crisis in 2009.

Sector Challenges and Broader Economic Impacts

Builders have been pulling back on residential projects over the past year due to a sluggish housing market and rising expenses associated with construction. In addition, both infrastructure and commercial development projects saw significant contractions in November. This trend is largely attributed to clients postponing investment decisions amid uncertainty surrounding the autumn budget and pervasive concerns about the overall UK economic outlook.

According to separate research conducted by the Bank of England, businesses across the UK cut jobs at the fastest rate in four years during November. A survey of chief financial officers indicated a reduction in employment at an annual rate of 1.8%, marking the sharpest contraction since July 2021. This survey, known as the decision maker panel, is closely monitored by Bank officials and has implications for the interest rate-setting committee.

Despite the bleak outlook reflected in these surveys, some economists remain cautious about interpreting the data too negatively. Robert Wood, chief UK economist at Pantheon Macroeconomics, suggested that the surveys might be influenced by chaotic speculation surrounding the autumn budget. He stated, “We find it hard to believe that conditions in the sector are genuinely as bad as during a full lockdown.”

Wood noted that construction output figures from the Office for National Statistics have performed better than the PMI survey thus far this year. He also highlighted that job postings increased in November, indicating potential resilience in the sector.

Mixed Responses from Economic Experts

Matthew Swannell, chief economic adviser to the EY Item Club, echoed Wood’s sentiments, asserting that the PMI data has been “much more pessimistic than official estimates.” He cautioned that the extremely weak PMI figures for November should be approached with skepticism.

Despite widespread disappointment in government progress regarding construction initiatives, the overall sentiment among some experts suggests that the situation may not be as dire as indicated. As the UK construction sector grapples with these challenges, the ramifications for employment and economic stability remain significant, warranting close observation in the months ahead.