UK construction sector gains momentum despite housing drag

The UK construction sector saw an uptick in activity last month, a closely-watched survey showed on Tuesday, although higher interest rates continued to weigh heavily on house building.

The latest S&P Global/CIPS UK Construction Purchasing Managers' Index nudged up to 51.6 in May from 51.1 in April and came in comfortably above consensus expectations of 50.8. A reading above the neutral mark of 50 indicates growth, while one below it suggests contraction.

Driving the rise was commercial building, at 54.2, and civil engineering, at 53.9, with respondents reporting faster decision making on new projects and improved customer confidence.

The survey also pointed to normalising supply conditions, which helped ease cost pressures.

However, higher interest rates continued to weigh heavily on housing activity, at 42.7. Work on residential building projects decreased for the sixth consecutive month and at the steepest rate since May 2020. Once the pandemic was stripped out, it was the weakest index reading for just over 14 years.

Tim Moore, economics director at S&P Global Market Intelligence, said: "Rising demand among corporate clients and contract awards on infrastructure projects underpinned the fastest rise in new orders since April 2022.

"However, cutbacks to new residential building projects, in response to rising interest rates and subdued housing market conditions, resulted in the sharpest drop in housing activity for three years."

John Glen, chief economist at the Chartered Institute of Procurement and Supply, said: "The residential sub-sector is closely linked to consumer confidence and levels of spending. A further hike in interest rates is expected this month, and along with the relentless increase in the cost of living, it is making buyers hesitate about purchasing homes."

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said: "The construction sector is not sharing in the wider economic recovery. The construction PMI edged up in May but it was a pretty hefty 2.4 points lower than the composite PMI.

"We expect construction output to finish the year about 3% lower than a year ago, despite the mixed picture implied by the survey. Builders likely started more housing units than required to meet demand this spring, so that they did not have to comply with stricter building rules, which have applied since the beginning of June.

"Note too that mortgage rates have begun to rise again in recent weeks, following the pick-up in markets’ expectations for the bank rate, which will ensure that house purchase demand remains weak."

The survey was carried out between 11 and 30 May.