Construction firms clear backlogs before downturn hits

Construction firms are clearing a huge backlog of work, but the sector is on course to shrivel in the coming months as it is whacked by soaring interest rates, a closely watched survey published today.

S&P Global and the Chartered Institute of Procurement and Supply’s (CIPS) purchasing managers’ index (PMI) for the construction industry swung back to growth last month, hitting 52.3, up from 49.2 in August.

The rise means a majority of construction companies grew last month. The PMI also topped the City’s expectations.

However, the output boost is likely to have been driven by firms racing to finish work mothballed due to a shortage of materials caused by supply chain pressures.

PMI index long-term trend

Trade flows are coming back online after they were gummed up by a combination of Covid-19 restrictions, high transport costs and worker shortages.

“Latest data signalled the least marked lengthening of vendor lead times since the pandemic began,” S&P Global and CIPS said.

New order growth, a measure of demand in the construction sector, was the weakest since June 2020.

There are “deepening concerns across the construction sector [about] rising interest rates, the energy crisis and UK recession risks… dampen[ing] client demand in the coming months,” Tim Moore, economics director at S&P Global Market Intelligence, said.

“The renewed rise in construction activity signalled by the increase in the PMI in September looks likely to be a blip from the emerging downward trend,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said.

“The upturn in output appears to reflect easing supply chain issues, which have enabled builders to reduce work backlogs,” he added.

Experts have warned the UK house prices could fall as much as 20 per cent driven by prospective buyers shunning purchases due to higher mortgage rates.

Lenders have pulled mortgages from the market in response to the government’s mini budget lighting a rocket under UK borrowing costs. 

Banks use the bond market to set mortgage costs. Rates have fluctuated since the government’s mini budget, making it tougher for them to price products properly.

The Bank of England has hiked rates seven times in a row to 2.25 per cent. Markets think borrowing costs will peak near six per cent next year.