UK Construction Activity Sees Sharpest Fall Since May 2020

British construction activity fell last month at its sharpest rate since May 2020, as new orders dried up in the face of rising interest rates and broader cost pressures, a survey showed on Friday.

The S&P Global/CIPS Purchasing Managers' Index (PMI) for the construction sector dropped to 48.8 in December from 50.4 in November, well below the average forecast of 49.6 in a Reuters poll of economists and beneath the 50 level that separates growth from contraction.

"The UK's construction sector registered a relatively poor finish to 2022, with business activity falling into decline following a three-month growth sequence amid the fastest contraction in new work since the initial pandemic period in May 2020," S&P Economist Lewis Cooper said.

Britain's construction sector had been performing strongly earlier in 2022, with output up 7.4% in the year to October according to official data. However, Bank of England interest rates have been rising steeply - hitting a 14-year high of 3.5% in December - and house prices have recently started to fall. Major mortgage lender Halifax last month forecast an 8% house price fall for 2023. The construction PMI showed falls in both house building and civil engineering work. The former dropped at the fastest pace since May 2020 while the latter has been declining since July.

Commercial projects increased slightly, but overall employment fell for the first time since January 2021, when there were widespread COVID-19 lockdown restrictions. The Bank of England estimates that Britain has entered what is likely to be a shallow but potentially lengthy recession, as surging inflation and the higher interest rates needed to combat it sap consumer demand.

The construction PMI's measure of input cost inflation dropped to a two-year low in December but is still well above pre-pandemic levels. Friday's all-sector PMI - which includes services and manufacturing data released earlier this week, as well as the construction number - edged up to 49.0 in December from 48.4 in November, but has been below 50 since August.