Construction industry rebounds to highest level in two years but clarity needed on access to funding

According to the latest PMI data by S&P and CIPS, the headline construction PMI for July increased to 55.3, up from 52.2 in June, the highest level since May 2022 and following the upward trend seen throughout the majority of 2024.

The main contributors to the latest increase were civil engineering activity, housing activity and new orders, which jumped to 56.5, 51.5 and 55.6 respectively. 

Kelly Boorman, national head of construction at RSM UK, said: “The headline construction PMI in July reached the highest level since May 2022, showing the industry is continuing its recovery. This reflects positive sentiment in response to the government’s focus on local housing targets with greater transparency towards planning and infrastructure. This was seen in upticks in civil engineering activity, housing activity and new orders indices, a sign that things are moving in the right direction, especially as housing activity reached its highest point since September 2022. The acceleration in housing activity is also bolstered by the recent cut in base rates which will stimulate the mortgage market.

“The monthly increase in civil engineering activity as a result of mobilisation of large projects and an uptick in new orders to 55.6 confirms that government continues to focus on delivery of infrastructure projects. By prioritising planning and housebuilding in conjunction with local authorities developing long-term infrastructure strategies, this ensures housing is developed locally, with access to education, healthcare and transport services.”

She added: “But, there has been some volatility in the market, due to a lack of access to affordable funding, the impact of wet weather and ongoing labour shortages. With the availability of subcontractors falling in July, there is likely to be a tightening of labour and the supply chain due to increased activity, so there are some concerns over whether housing targets are achievable.

“To avoid housebuilding targets from becoming pie in the sky, construction needs more clarity on where labour and funding is coming from to realise housing volumes, especially businesses with plans for growth and ability to manage working capital.”

Thomas Pugh, economist at RSM UK, said: “The strong rebound in the S&P/CIPS Construction PMI in July is another sign that the broad economic rebound, which had taken hold in the first half of the year, has continued into Q3.

“Moves by the new government to ease planning restrictions have probably boosted sentiment, especially around house building. The cut in interest rates in early August will be followed by at least one more cut this year, which will also be supportive of the housing market, which should feed through into housebuilding.

“As a slight note of concern, the input price balance rose to 53.7. There is clearly a huge shortage of skilled labour in the industry and as output ramps up, demand for that limited pool of labour may put upward pressure on costs. That will be one area that both the government and the Bank of England will want to watch closely.

“Overall, the PMIs are still painting a picture of a gradually recovering economy. Indeed, new orders in the construction industry rose to their highest level since April 2022. Now that inflation is back at 2% and interest rates have started falling, there is clear evidence that consumer and business confidence is returning. That should result in a boost to consumer spending and business investment over the rest of the year, which will support the recent acceleration in GDP growth.”