UK construction activity declined at its sharpest rate since the early months of the Covid pandemic in July, driven by a collapse in housebuilding, according to new data from S&P Global Market Intelligence.
The latest UK construction purchasing managers’ index (PMI) fell to 44.3 in July from 48.8 in June — the lowest reading since May 2020, when the first national lockdown brought much of the industry to a standstill. A reading below 50.0 indicates contraction.
The headline figure was dragged down by a significant drop in residential construction, coupled with a fall in civil engineering activity and a softer downturn in commercial building projects.
The findings, based on a survey of 150 construction firms, provide a worrying early signal of weakening momentum in the UK economy and pose fresh challenges for Labour’s ambition to deliver 1.5 million new homes by the end of the parliament.
“Forward-looking indicators from the survey imply that UK constructors are preparing for challenging times ahead,” said Joe Hayes, principal economist at S&P Global.
“Firms reported a lack of tender opportunities and hesitancy from customers to commit to projects. Broader themes of uncertainty, both domestic and international, will do little to reignite investment appetites.”
The housing activity sub-index dropped sharply from 50.7 in June to 45.3 in July, confirming that homebuilding — long considered a key growth driver — is now under mounting pressure. Nearly 41% of firms reported falling activity in July.
The figures raise serious questions over the Labour government’s pledge to build 1.5 million homes over the next five years. Analysts and industry leaders have already expressed scepticism, warning that planning reform, while necessary, will not be sufficient if high construction costs, labour shortages, and economic uncertainty persist.
The government has committed £39 billion to social housing and outlined proposals for planning deregulation and a new generation of towns, but the short-term headwinds facing the sector could derail progress.
“The outlook for housebuilding is mixed,” said Matt Swannell, chief economic adviser to the EY Item Club. “Planning reform is welcome, but it’s being countered by rising construction costs, labour shortages, and a tough operating environment driven by elevated National Insurance contributions and the national living wage.”
July’s PMI release follows a series of disappointing economic indicators. The UK economy contracted in April and May, unemployment is rising, and inflation ticked up to 3.6% in June, well above the Bank of England’s 2% target.
The services sector also reported its sharpest fall in new orders in almost three years, further illustrating the fragility of demand.
Meanwhile, businesses have shed staff for five consecutive months, following the government’s £25 billion NICs hike in April. The tax burden is weighing heavily on payroll costs and investment sentiment.
The Bank of England is widely expected to respond with a quarter-point rate cut, potentially bringing the base rate down to 4%, its fifth reduction in a year. Financial markets now anticipate a base rate of 3.5% by late 2026.
“The economy has been weaker than the MPC anticipated,” said Sanjay Raja, chief UK economist at Deutsche Bank. “Wage momentum has softened, and growth has slipped below expectations.”
Despite the grim data, some economists remain cautiously optimistic that the construction sector could stabilise later this year.
“We still think the fundamentals point to sentiment gradually improving,” said Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics. “Lower interest rates, easing tariff uncertainty, and increased government investment should help the PMI recover over the coming months.”
The Treasury is also under pressure to avoid further tax increases in the autumn Budget, after the National Institute of Economic and Social Research (NIESR) warned of a potential £50 billion shortfall in public finances. Business groups have warned that additional tax hikes could undermine investment at a time when economic momentum remains fragile.
For now, the construction sector — and the government’s housing agenda — appears caught between long-term ambition and short-term economic reality.
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UK construction activity slumps to lowest level since Covid amid housing slowdown
