Rapidly declining construction activity observed, last seen in 2020

Rapidly declining construction activity observed, last seen in 2020

The UK construction industry is experiencing a continued contraction, with the latest data indicating a steep decline. By July 2025, the Construction PMI had fallen sharply to 44.3, marking the steepest contraction since May 2020, highlighting sustained falls across all key sectors - civil engineering, residential, and commercial building.

This contraction is driven by a complex mix of factors. Weaker demand, site delays, fewer new business volumes, and lower client confidence are among the key reasons for the decline in new orders and employment. About 76% of construction firms struggled to recruit qualified workers, restricting output and growth potential.

Financial pressures and insolvencies are another significant challenge. Construction represented 17.2% of insolvencies in England and Wales in May 2025, up 18.5% from April 2025. Cash flow and contract cycle issues contributed to financial vulnerability.

Reduced infrastructure investment and project cancellations also play a role. Several major infrastructure projects were delayed or canceled, including the £1.2 billion A12 widening and A47 upgrades, due to government spending restrictions and regulatory slowdowns. The previous curtailment of HS2 also negatively impacted demand, particularly for materials like bitumen used in roadworks.

Weak client confidence and fewer tenders are another issue, with economic uncertainty dampening client spending and tender opportunities, leading to reduced new orders and project starts. Supply chain and cost pressures remain elevated, despite input price inflation slowing to its softest pace since January 2025.

On the policy side, the UK government announced a £725 billion 10-year infrastructure strategy in mid-2025, aiming to spur growth and construction activity. However, such initiatives are only beginning to roll out and have not yet alleviated the immediate sectoral contraction.

The sector is crucial for the Labour government's plans for a house building boom and improvements in infrastructure. However, there is less work being undertaken on public sector projects, which is a concern for Labour due to its commitment to build railways, motorways, and power plants.

The number of new home registrations in London has more than halved, with only 904 new homes registered in Q2 2025, a significant decrease from 2,191 in Q2 2024. The sector is also facing additional challenges from post-Grenfell fire safety regulations, which require any building above seven stories to have a second staircase, adding red tape to the construction process.

Elliott Jordan-Doak of Pantheon Macroeconomics sees a small rise in S&P Global's employment index as a "bright spot." He also notes the moderation of input price pressures as likely to be welcomed by bosses. Despite this, the drop in the construction PMI introduces downside risks for Q3 GDP growth, according to Jordan-Doak (0.2%).

However, there is some optimism for the future. The Bank of England is expected to cut interest rates in August, reducing borrowing costs for businesses. The shock from tariff-uncertainty is expected to continue fading. Jordan-Doak also expects the PMI to recover over the coming months.

In conclusion, the contraction of the UK construction industry is a complex issue, driven by a combination of labour shortages, financial fragility, reduced infrastructure spending, weak market confidence, and supply chain pressures. However, government investment plans and expected interest rate cuts offer some hope for recovery in the coming months.

[1] National House Building Council (NHBC) [2] Office for National Statistics (ONS) [3] Infrastructure and Projects Authority (IPA)

1. The contraction in the UK construction industry, as indicated by the steep decline in the Construction PMI, is influenced by a multitude of factors such as decreased demand, site delays, fewer new business volumes, and reduced client confidence.
2. Financial pressures and insolvencies are also significant challenges for the construction industry, with construction representing 17.2% of insolvencies in England and Wales in May 2025.
3. Fewer tenders and reduced client confidence, stemming from economic uncertainty, have resulted in fewer new orders and project starts in the industry.
4. Despite the ongoing contraction, there is some optimism for the future, as the Bank of England is expected to cut interest rates and government investment plans, such as the £725 billion 10-year infrastructure strategy, may help alleviate the sectoral contraction.

[References: National House Building Council (NHBC), Office for National Statistics (ONS), Infrastructure and Projects Authority (IPA)]

Read also: