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UK construction returns to growth but optimism hits 26-month low

UK construction workers operate a piece of measuring equipment at the HS2 rail Curzon Street Station
UK construction firms said clients were slow, or reluctant, to sign off projects due to inflation concerns, squeezed budgets and worries about economic outlook. Photo: Phil Noble/Reuters

UK construction managed to return to growth in September, however, business optimism fell as new orders declined.

According to S&P Global’s construction purchasing managers’ index (PMI), activity improved unexpectedly last month, rising for the first time since June.

The index rose to 52.3 during the period, up from 49.2 in August, which showed a return to growth as supply chain problems eased. Any reading above 50 indicates growth.

However, business optimism hit the lowest since July 2020 amid stalling orders, rising interest rates, and the growing threat of a recession.

PMI activity fell in September. Chart: S&P Global
PMI activity fell in September. Chart: S&P Global

Housebuilders reported that activity rose, with growth reaching a five-month high, while commercial work increased only marginally, and civil engineering activity fell for the third month in a row.

Construction firms said clients were slow, or reluctant, to sign off projects due to inflation concerns, squeezed budgets and worries about economic outlook.

Subdued client demand contributed to a marginal reduction in purchasing activity across the construction sector. Survey respondents also suggested that a turnaround in supplier performance had led to reduced inventory building.

However it came as supply shortages eased in September, with delivery delays the least widespread since February 2020.

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Meanwhile, employment growth accelerated from August's 17-month low. Around 21% of the survey panel reported a rise in staffing levels, while only 8% signalled a decline.

Higher workforce numbers reflected efforts to boost business capacity, although construction firms continued to cite shortages of candidates to fill vacancies and strong wage pressures.

Average cost burdens increased sharply in September, but the overall rate of inflation eased to its lowest since February 2021.

Survey respondents noted escalating energy costs and greater prices paid across the board for construction products and materials.

Lower fuel prices and improved transportation availability were cited as factors helping to moderate the overall pace of cost inflation in September.

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John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: "Developments in the UK economy have given the sector food for thought as supply chain managers reported softer levels of buying last month and the new orders index slipped to its lowest since May 2020.

“Though the headline index showed growth after two months in contraction, the devil lies in the detail pointing to lower customer confidence, a challenging UK economy and recession on the doorstep.”

Watch: How does inflation affect interest rates?