Construction industry needs government and investor incentives to tackle school building crisis

06 September 2023
According to the latest PMI data by S&P and CIPS, the headline construction PMI for August fell to 50.8, following July’s unexpected rise to 51.7 – its highest level since February. 

The data shows falls across the majority of indices, most notably in housing activity and new orders, which fell to 40.7 and 47.5, both clear signs that the construction industry faces financing and infrastructure challenges over the next year. 

Commenting on the data, Kelly Boorman, partner and national head of construction at RSM UK, said: ‘This month’s fall in the headline PMI to 50.8 reflects the ongoing slowdown in the residential market as housebuilders’ pipeline of activity dried up due to interest rates and inflation. However, as government seeks to accelerate the repair works to school buildings as to avoid disrupting the education of pupils, we will likely see an uptick in construction activity in the coming months as repair works stimulate the market in the coming months. 

‘In the short-to-medium term, this brings welcome news for the industry, given the stabilisation of material prices and availability of labour improving. As a result, this may lead to an uplift in activity in the residential market, as refurbished school facilities may attract families to the local area. The spotlight is also on NHS buildings and universities which require urgent attention, and as such, demonstrates the scale of public sector infrastructure intervention required to ensure adequate education and healthcare facilities.’

She added: 'However, this level of intervention needs long-term financing, procurement and legislation, which will cause some delays and further challenges for the market. This, coupled with house prices continuing to fall during 2024 due to uncertainty around interest rates, means that we will continue to see the housing market stagnate. To combat financial uncertainty, many households will convert to variable rates, as families decide to stay put in homes they are outgrowing. This is reflected in the latest drop in housing activity to 40.7, which was expected, and also demonstrates the weakened demand in the residential market. As the government navigates the school building crisis, alongside expensive mortgages and a shortage of first-time and affordable housing, the industry will need some injection of government incentives and investor stimulation.’ 

Thomas Pugh, economist at RSM UK, said: ‘The construction industry, with the exception of housing, appears to be holding up better than the services and manufacturing sectors. However, the drop to 50.8 in August suggests the sector is stalling rather than growing. 

‘Despite the falls in all three PMI indicators in August, we still expect the economy to growth in Q3. Indeed, the RSMUK MMBI Q3 results show that the middle market at least is holding up well. Easing strike disruption in the public sector will also help boost growth. We are expecting growth of about 0.2% per quarter over the rest of this year. 

‘What’s more, the drop in the input prices balance to 50.7 suggests that price pressure in the construction industry is continuing to ease. This is a similar story to the services and manufacturing sectors. As such, the PMIs in general suggest inflation is easing. That won’t prevent the MPC from hiking one more time later this month, but it suggests that a terminal rate of 5.5% may be looking more likely than one of 5.75%’