Construction activity in the UK dipped for the second successive month in August, as new order growth slowed to its weakest since June 2022, according to the latest monthly PMI® report.

The drop came as customer demand moved closer to stagnation amid cost pressures and economic uncertainty.

Concerns about wider economic prospects led to a drop in business confidence and slower job creation, while firms’ purchasing activity declined.

Falling buying activity did alleviate some pressure on supply chains, with lead times lengthening to the least extent in two-and-a-half years, while inflationary pressures also showed signs of waning.

The S&P Global/CIPS UK Construction Purchasing Managers’ Index® (PMI®) - which measures month-on-month changes in total industry activity – was at 49.2 in August, up fractionally from 48.9 in July but still below the 50.0 no-change mark and signalling a reduction in construction activity over the month.

As was the case in July, civil engineering posted the sharpest decline in activity of the three monitored categories, seeing output fall markedly over the month.

Commercial activity also declined, ending a period of growth stretching back for a year-and-a-half.

On a more positive note, activity on housing projects increased for the first time in three months, although only fractionally.

While some firms increased activity in response to the ongoing growth of new orders, this was outweighed by those constructors that saw output decline as firms adjusted to signs of demand weakening. 

New orders increased only marginally in August, and to the least extent since June 2020. 

Some respondents indicated customers were holding back on committing to new orders amid cost pressures. Alongside inflationary pressures, concerns around the potential for a wider economic downturn also impacted the sector in August.

In some cases, concerns around the wider economic environment impacted hiring decisions. 

Although rising new orders, the clearing of backlogged work and the filling of previously vacant positions kept employment rising solidly, the rate of job creation eased to the softest since March 2021.

Construction firms scaled back their input buying for the first time since the initial wave of the COVID-19 pandemic, again reflecting signs of a slowdown. 

There were also some reports that less pronounced price and supply pressures reduced the need to build inventories. 

In fact, the reduction in pressure on suppliers meant that vendor lead times lengthened to the least extent for two-and-a-half years in August.

As well as scaling back purchasing and slowing the rate of job creation, construction firms kept their usage of subcontractors unchanged in August. This ended an 18-month sequence of expansion. Meanwhile, the rate of subcontractor availability continued to fall sharply, and to the largest degree in six months.

Andrew Harker, economics director at S&P Global Market Intelligence which compiles the survey, said: “The UK construction sector looks set to be in for a challenging period, according to the latest PMI data. Not only did construction activity fall for the second month running, but a range of indicators from the survey pointed to further weakness ahead. 

“New orders slowed to a crawl, while concerns about the sector and the wider economy led to a drop in confidence.” 

Following the latest PMI data, industry leaders are now calling on new prime minister Liz Truss to support industry – especially on the urgent issue of energy. 

Stephen Marcos Jones, CEO of the Association for Consultancy and Engineering (ACE), said: “The headline from the survey results is that construction is entering a period of significant challenge. 

“Now the election process has been concluded, the new prime minister and her cabinet need to make up for lost time and provide support for businesses on energy as soon as possible. 

“While not affecting the fundamental weaknesses demonstrated in these figures, it will go some way to easing concerns and boosting business confidence at a critical moment for the sector.”

Mark Robinson, group chief executive at public sector procurement authority SCAPE, added: “Another month of declining activity is further evidence of market uncertainty created by inflation, as developers focus on getting existing projects over the finish line, before pressing ahead with new ones. 

“With the construction sector’s energy bills set to rise more than five-fold, industry leaders will be looking to the new prime minister Liz Truss to tame inflation and deliver some stability for forward planning. 

“The impact of any intervention is unlikely to be immediate though, so the industry should be working now to ensure that the supply chain is shielded as much as possible from the worst effects of the upcoming recession.”

Joe Sullivan, partner at MHA, believes the summer holiday season and government paralysis have brought construction down to earth.

“The industry has managed to maintain growth since early 2022 until the tables turned last month. The summer holiday season and the paralysis of government over the past six weeks have stunted the industry, especially the civil engineering sector. The contraction does not look like it will begin to abate any time soon. 

“The number one priority must be to guard against soaring energy costs causing a rash of business failures in the sector. The new prime minister Liz Truss could take two measures immediately to help: reinstate the red diesel rebate and provide additional support for the most energy intensive aspects of the sector, such as aggregate, asphalt and cement businesses. These measures would help curtail the inflationary pressures throughout the supply chain.”

Max Jones, director in Lloyds Bank’s infrastructure and construction team, added: “The new prime minister will bring their own spending priorities, but contractors are hoping for a refocus on the government’s original objectives: the UK’s infrastructure and its net zero targets. This will give construction firms confidence to invest in their businesses and workforces.”

PMI data was collected between August 12-30.