Construction output has declined for the first time since January 2021, according to the latest monthly PMI® report. 

Business optimism remained subdued across the construction sector in July, with growth expectations well below those seen in the opening months of 2022. July data saw lower volumes of residential work and civil engineering activity.

Recession concerns, the cost of living crisis and lower levels of consumer confidence were the most commonly cited factors affecting business expectations in July.

The S&P Global/CIPS UK Construction Purchasing Managers’ Index® (PMI®) - which measures month-on-month changes in total industry activity - was 48.9 in July, down from 52.6 in June. 

The index was below 50.0 no-change threshold for the first time since January 2021. 

Civil engineering was the worst-performing segment in July (index at 40.1), with business activity falling to the greatest extent since October 2020. 

House building declined for the second month running, but the rate of contraction was only slight (index at 49.4). 

Commercial work bucked the downturn seen elsewhere (52.3 in July), although growth was the weakest for 18 months. 

July data indicated an overall rise in new orders for the 26th consecutive month – although the latest upturn in new business was notably weaker than seen on average in the first half of 2022. 

Some construction companies cited a lack of new projects to replace completed contracts.

Employment numbers expanded at a robust and accelerated pace in July but reports of difficulties filling vacancies and strong wage pressures continued.

Purchase price inflation eased considerably (index at 78.1, down from 85.8 in June), with the latest rise in cost burdens the least marked since March 2021. 

Construction firms noted upward pressure on business expenses from higher energy, fuel and transport costs, but this was partly offset by some easing in commodity prices.

Around 22% of the survey panel reported longer lead times from suppliers in July, while 7% signalled an improvement. 

The degree of positive sentiment picked up slightly from June's 23-month low. Around 42% of the survey panel anticipate a rise in output during the year ahead, while only 15% forecast a decline.

Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey, said: “July data illustrated that cost of living pressures, higher interest rates and increasing recession risks for the UK economy are taking a toll on construction activity. 

“Total industry output fell for the first time since the start of 2021 as civil engineering joined house building in contraction territory. Only the commercial segment registered growth in July, supported by strong pipelines of work from the reopening of hospitality, leisure and offices.”

Mark Robinson, group chief executive at public sector procurement authority SCAPE, said: “July represents peak season for the construction sector, so a decline in industry activity undoubtedly serves as cause for concern.

“Looking ahead, it’s clear that the task of filling order books is becoming more challenging, with input costs continuing to increase and developers reviewing their plans if not putting them on hold. 

“Many contractors will be looking to the outcome of the Tory leadership race for a steer on future economic conditions – particularly in terms of public spending as community-focused investment continues to prove a catalyst for local growth. In the meantime, contractors will need to work diligently with clients to ensure projects continue to progress on time and to budget.”

Brendan Sharkey, head of construction and real estate at MHA, added: “Many businesses will be closely monitoring developments in the conservative leadership election over the month ahead. 

“A reduction of the planned 25% corporation tax cut, a review of the HS2 extension and reduction of red tape on building new homes (mooted by both candidates) would help the sector power through the difficulties ahead. Yet for now, this just remains speculative and come September it may be a very different story.”

Toby Banfield, financial restructuring partner at PwC, said: “July’s results continue to follow the downward trajectory of the index over the first half of the year. Smaller, privately owned contractors typically increased their financial leverage during the pandemic. However, with cash now very tight due to a period of rising interest rates, high material prices and increasing labour inflation, these businesses are feeling the impact of the current economic environment. 

“We are finding that our clients across the supply chain are most worried about how smaller, privately owned contractors are going to be able to manage through the current trading environment. Due to these circumstances, we are seeing suppliers reducing credit terms offered to contractors, which may be reflected in the lower levels of stock building reported in the July figures.”

PMI data was collected between July 12-28.