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UK construction activity contracts for third month in a row

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High interest rates and a slowdown in housebuilding have driven a contraction in UK construction activity for the third month in a row, according to new data released on Wednesday.

The S&P Global/Cips UK construction purchasing managers’ index fell marginally to 45.5 in November from 45.6 the previous month. The figure was below economists’ expectations of 46.3 and the 50 mark, indicating that most businesses have reported a decline in activity since August.

A stagnation in construction output over the year to September has contributed to a lack of economic growth in the UK. The latest data suggested the sector had been squeezed during the autumn months as high borrowing costs hit demand.

“A slump in housebuilding has cast a long shadow over the UK construction sector,” said Tim Moore, economics director at S&P Global Market Intelligence. He added that there were signs of “weakness spreading to civil engineering and commercial work”.

The PMIs are based on a sector-wide survey and provide a timely indication of activity ahead of the release of official output figures for November due in mid-January.

The low November reading was driven by housebuilding with an index of 39.2, signalling a sharp decline in activity. Builders cited cutbacks to residential development projects and a general slowdown in business due to unfavourable market conditions.

Commercial building and civil engineering sectors both reported a deterioration from October with readings below 50 at 48.1 and 43.5, respectively.

John Glen, chief economist at the Chartered Institute of Procurement and Supply, a professional body which helps to compile the survey, said that “inflated borrowing costs and falling demand have conspired to further slow new building” last month.

The Bank of England voted to maintain interest rates at 5.25 per cent in November, in a push to bring it down to its 2 per cent target.

At the same time, the combination of normalising supply chains, greater price competition among suppliers and falling raw material costs contributed to input costs dropping at their fastest pace since July 2009.

Separate PMI data published earlier in the week for manufacturing and services marked construction as the worst performing sector, with services reporting a marginal expansion last month and the downturn in manufacturing easing.

Economists expect the weakness in the construction sector to continue as interest rates remain elevated. Markets are pricing in that rates will remain at their 15-year high of 5.25 per cent for at least the first half of 2024.

“We expect construction activity to remain weak in the near term,” said Giulia Bellicoso, economist at Capital Economics. “High financing costs and uncertainty over capital values, alongside the fact that we expect the economy to stay weak throughout 2024, will act to keep new development subdued over the coming months.”

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