UK construction activity contracts as ‘full impact’ of Budget sets in

Activity in Britain’s construction sector fell for the first time in nearly a year last month as housebuilding woes deepened, according to new figures.

The latest S&P Global construction purchasing managers’ index (PMI) showed a reading of 48.1 in January, down sharply from 53.3 in December and the first result signalling a contraction since February 2024.

Most economists had expected activity to rebound to 53.7 in January, with a reading below the “no-change” threshold of 50 indicating activity is shrinking.

Accountancy firm MHA said the construction gloom comes as the “full impact of the proposed tax rises and increased labour costs in the Autumn Budget” is setting in across the sector and wider economy.

Housebuilding activity decreased for the fourth month in a row and at the fastest pace for a year, despite Government moves to pledge policy support to boost the development of new homes, according to the PMI report.

There were declines across all three main parts of the sector and firms were also downbeat over the outlook, with the report revealing the weakest business activity expectations since October 2023.

Atul Kariya, head of real estate and construction at MHA, which is part of Baker Tilly International, said: “It is hardly surprising that construction PMI activity has fallen as the industry and the economy as a whole are now starting to see the full impact of the proposed tax rises and increased labour costs in the Autumn Budget.

“These are starting to feed through into overall business sentiment in the sector as well as ongoing challenging economic conditions in the UK and overseas.”

Chancellor Rachel Reeves dealt a blow to businesses last October when she announced a hike in national insurance contributions and another rise in the minimum wage, sending staff costs soaring.

Tim Moore, economics director at S&P Global Market Intelligence, said the marked pullback in construction activity came amid uncertainty over the wider economy and high interest rates.

“Anecdotal evidence suggested that caution regarding demand for new projects was prevalent at the start of 2025, despite strong policy support for house building and hopes for a longer-term boost to supply via planning reform,” he said.

He added: “The forward-looking survey indicators were also relatively downbeat in January.

“New orders decreased at the fastest pace since November 2023 amid many reports of delayed decision-making by clients.

“Reduced workloads, combined with concerns about the general UK economic outlook, led to a dip in business activity expectations to the lowest for 15 months.”