Press release

6 Oct 2022 London, GB

Construction returns to growth, but headwinds are building – EY ITEM Club comments

Martin Beck, Chief Economic Advisor to EY ITEM Club, provides comments on the latest public finance news.

Related topics Growth

  • Unlike the other sectoral surveys, September’s construction PMI changed the pattern of stagnation or contraction, by rising above the 50 ‘no-change’ mark for the first time since June. However, the construction sector’s ability to continue growing still faces many challenges.  

  • The recent rise in mortgage rates points to a significant slowdown in the housing market and probably an outright decline in house prices, developments which would likely weigh on house building. Sterling’s weakness will exacerbate already strong cost pressures facing construction businesses. Meanwhile, high inflation and falling household real incomes are likely to discourage spending on home improvements.

  • However, government action to limit rises in businesses’ energy bills for the next six months will constrain at least one source of cost pressures and is helpful for the relatively-energy intensive construction sector. 

Martin Beck, chief economic advisor to the EY ITEM Club, says: “After September’s PMIs for the services and manufacturing sectors signalled stagnation and contraction in output respectively, August’s construction PMI delivered a more positive result. An index of 52.3 was up from 49.2 in August and the first reading above the 50 ‘no-change’ mark – separating the S&P Global/CIPS survey’s measure of expansion from contraction – in three months.

“There was also some good news on inflationary pressures in the sector, with costs growing at their slowest pace since February 2021, aided by lower fuel prices.

“But the EY ITEM Club is doubtful that the construction sector can maintain September’s expansion. The recent increase in mortgage rates points to a significant slowdown in the housing market and most likely an outright decline in house prices, developments which would likely affect house building. Sterling’s weakness will exacerbate already strong cost pressures facing construction businesses. Meanwhile, high inflation and falling household real incomes are likely to discourage spending on home improvements.

“However, the outlook is not entirely downbeat. Government intervention to limit rises in businesses energy bills for the next six months will be particularly helpful to the relatively-energy intensive construction sector.”