Softer residential demand weighs on UK construction sector

The UK construction sector slowed last month, a closely-watched survey showed on Thursday, as higher borrowing costs hit residential demand.

The S&P Global CIPS UK construction purchasing managers' index came in at 50.7 in March, down notably on February’s 54.6 although it remains above the neutral 50.0 threshold. A reading above 50.0 indicates growth, while one below it suggests contraction.

It was, however, well below consensus expectations of 53.8.

Civil engineering was the best-performing sub-category, at 52.0, boosted by work on the HS2 rail project and robust demand from other transport-related construction.

But housing activity came in a 44.2, falling from 47.4 in February and the fastest rate of decline since May 2020. Respondents blamed fewer tender opportunities due to higher borrowing costs and a subsequent shut down in new house building projects.

Commercial building work was also softer. While still in positive territory at 51.1, the sub-sector saw the rate of expansion ease from February’s high.

However, optimism among builders rose to the highest level since February 2022, with 46% of the panel forecasting an increase total construction output in the year ahead and only 11% expecting a reduction.

Tim Moore, economics director at S&P Global Market Intelligence, said: "Despite worries about the near-term outlook for housing activity, expectations for total construction output for the year ahead where relatively update. Growth projections were boosted by the fastest improvement in suppliers’ delivering times for a more than a decade."

John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: "Strong inflationary pressures remained an obstacle to wider expansion at building companies, along with concerns over consumer affordability rates.

"With residential building still struggling, it was the bigger projects like HS2 that added fuel to the engine of construction growth this month."

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "The downturn in housebuilding appears to be gathering steam.

"Builders had to complete any homes that had been purchased with the support of the Help to Buy scheme by 31 March, so the downturn might gather pace in the second quarter. Housebuilding also likely will drop off in July, from when all new homes that are started must comply with stricter ‘part L’ regulations.

"We look for around a 3% year-over-year decline in total construction output this year."