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High interest rates and inflation push UK construction sector back to pandemic levels

interest rates  A builder working for Taylor Wimpey builds a roof on an estate in Aylesbury, Britain, February 7, 2017.  REUTERS/Eddie Keogh
‘Wrecking ball’ of inflation and interest rates hits UK property market. Photo: Eddie Keogh/Reuters

The construction sector has suffered its lowest level of activity since the early months of the pandemic as higher inflation and interest rates hit the property market.

The latest S&P Global/CIPS construction purchasing managers’ index scored 48.4 last month, slipping from 48.8 in December. Any score below 50 is considered a decline whereas anything above is seen as growth.

Building firms blamed weaker client demand, and a slowdown in new projects in recent months due to rising borrowing costs.

Read more: UK services sector has worst month in two years

Soaring mortgage rates in recent months have taken their toll on the housing market, slowing demand for mortgages to the lowest level since the 2020 lockdown.

Tim Moore, economics director at S&P Global Market Intelligence, said: “A sharp and accelerated decline in housebuilding activity led to the weakest UK construction sector performance for just over two and a half years in January.

“Construction companies once again cited a headwind from lacklustre market conditions, rising interest rates and fewer new project starts in the residential segment.

“Commercial building also slipped into contraction as the subdued UK economy weighed on business investment.”

Housing activity plummeted to 44.8, after a reading of 48 in December.

Read more: Average UK house price falls to £258,297

John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: "The wrecking ball of higher inflation and interest rates has knocked the UK’s residential building output to its weakest since May 2020 as stretched mortgage affordability impacted on the building of new homes.

“The continuing price pressures for energy and wages still remain a concern, along with the highest level of job shedding for two years and building skills remaining in short supply.

Evidently, there are still roadblocks ahead, but we should have faith that the sector can see a path through for better outcomes in 2023 after languishing in contraction in the last few months.”

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