Construction industry braced for continued slowdown in housing market despite uptick in PMI

According to the latest PMI data by S&P and CIPS, the headline construction PMI for October increased slightly to 45.6, up from 45 in September, showing some signs of stabilisation. This follows ongoing disruption to government infrastructure projects, exacerbated civil engineering activity, and slowdown in the housing market. 

Commenting on the data, Kelly Boorman, partner and national head of construction at RSM UK, said: ‘This month’s slight uplift in the headline PMI to 45.6 brings surprisingly welcome news for the construction industry, especially after September’s steep drop. The increase was driven by an uplift in commercial activity to 49.5, which suggests stability is returning to the market and is a positive sign that construction output will continue to improve, albeit slowly. The Bank of England’s decision to maintain its base rate at 5.25% for the second month, after 14 consecutive months of hikes is also encouraging, after months of disruption to pipelines with the housing market really feeling the pinch. It’s always a tough time of year for construction as we get into winter months, so hopefully this will facilitate some stimulation in the housing market. 

‘But, less positively, with rates predicted to remain high alongside continuing economic uncertainty, the industry is still braced for a tough 2024, as reflected in the falls in the future activity index to 58.9. Housing activity increased only slightly from 38.1 to 38.5, but house values are expected to fall further and housebuilders are navigating land impairment coupled with a drop in house volumes, making margins even tighter. Homeowners are therefore biding their time with re-mortgaging or moving house due to unaffordable mortgage rates, and first time buyers face the challenge of raising sufficient deposits in order to get on the ladder. As such, buyers are not compromising and seem prepared to sit it out until rates drop, and house prices stabilise. This will cause further pent-up demand for family homes and a shortage of affordable housing.’ 

She added: ‘While this pent-up demand could drive investment from overseas cash buyers, as seen in the uplift in commercial activity, especially as sterling remains weak, there are other key components driving activity in the construction industry, namely infrastructure projects. Following last month’s government announcement that HS2 is being axed, long-term industry outlook is bleak, as there’s still not been any major commitments outlined by government during last month’s party conferences to replenish the pipeline, leaving businesses stuck between a rock and a hard place. Given the time required to procure and mobilise these projects, industry will be waiting with bated breath for government announcements to build back margins, secure a stable pipeline, and retain skilled workers in the UK.’  

Thomas Pugh, economist at RSM UK, said: ‘The construction PMI followed the other PMIs in showing signs of stabilising, albeit at a weak level, in October. The economy probably contracted in Q3 and at face value the PMIs are pointing to another contraction in Q4, which would mark the start of a recession. 

‘However, the large cost-of-living grants paid to low-income households should boost spending and now that it is becoming clear that interest rates have peaked, confidence should start to come back to sectors like construction. As a result, we expect the economy to return to growth in Q4, avoiding a recession.’