UK house-building falls by most since 2020 as interest rates bite: PMI

HOUSE-BUILDING in the UK fell at the sharpest pace since May 2020 last month, a survey released on Thursday (Apr 6) showed.

The S&P Global-CIPS construction Purchasing Managers’ Index (PMI) fell to 50.7 in March, down from 54.6 in February. Still, last month’s reading indicated modest growth, and was the second-highest since October 2022, when the “mini-budget” crisis of former prime minister Liz Truss caused borrowing costs to leap.

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 during the year ahead were relatively upbeat in March.”

Hiring rose at the fastest rate since October 2022, reflecting greater workloads and new projects, and expectations for future activity were the highest since February 2022. Construction workers were recently added to the UK government’s shortage occupations list, which should make it easier for companies to recruit from abroad.

But in a sign that inflation is still rampant, construction companies reported further sharp rises in input costs relating to energy prices and rising wages. This could be significant for the Bank of England (BOE), which is watching intently for signs that inflation is becoming embedded in the economy through workers bargaining for higher wages.

More broadly, the PMI data suggested that Britain’s private sector avoided shrinking in the first quarter of 2023, after the economy as a whole eked out 0.1 per cent growth in the last quarter of 2022.

The all-sector PMI dropped to 52.1 in March from 53.2 the month before, but stayed above the 50 level, which divides growth from contraction. The all-sector figure includes data for the much larger services and manufacturing sectors, which was released earlier in the week.

Construction accounts for about 6 per cent of British economic output, and the sector recorded quarterly growth of 1.3 per cent in the last three months of 2022. The construction PMI’s slowdown in March was driven by a fourth consecutive monthly fall in house-building, which declined at the fastest rate since May 2020.

“A sharp and accelerated decline in house building was the main area of concern,” said Moore. “Cutbacks to new residential projects in the wake of subdued demand and rising interest rates contributed to the sharpest fall in housing activity across the construction sector for almost three years.”

SEE ALSO

UK house prices rise for 3rd month in a row

UK homes are taking almost twice as long to sell this year

Builders cited a reduction in new housing projects as a result of higher interest rates, S&P said. Last month, the BOE raised borrowing costs for the 11th time since December 2021, taking interest rates to 4.25 per cent.

Mortgage lender Nationwide Building Society reported last month that average house prices in March were 3.1 per cent lower than a year earlier, the biggest annual drop since 2009.

By contrast, civil engineering activity was buoyed by work on the government’s costly and delayed HS2 rail project, which aims to boost transport capacity between London and Birmingham.

Construction companies reported a marked reduction in supply-chain difficulties, which have hampered the sector since early in the Covid-19 pandemic.

BOE policymakers have said that they will look closely at how fast inflation pressures are easing before they decide whether to raise rates again at their next meeting in May.

Suppliers’ delivery times in March improved at the fastest pace since 2009, and input costs grew at the second-slowest pace since November 2020, though inflation remained historically high. REUTERS, BLOOMBERG