The UK's construction sector suffered a sharp fall in activity in April, as the Iran war battered confidence and drove up prices. S&P Global's monthly construction index for the UK dropped to 39.7 in April, down from 45.6 in March, indicating a significant contraction.
Rising Costs and Supply Chain Disruption
Builders are beginning to suffer from rising material costs caused by the blockage to the Strait of Hormuz, as housebuilding slows land buying and demand for homes weakens. Civil engineering activity suffered the biggest drop in April, down to 35.5, followed by housebuilding, which fell to 38.2. Construction firms widely reported falling demand and a lack of new work to replace projects completed in April, according to S&P.
Employees are bearing the brunt of empty order books, as the pace of job losses sped to its fastest rate in four months. Some firms told S&P they were unable to replace workers who left voluntarily because of the lack of new projects and strong upward pressure on wages.
Cost Inflation at Highest Since 2022
Cost inflation jumped at its fastest rate since June 2022, as building firms said they have suffered from shipping delays and difficulties with importing materials from the Middle East. More than two thirds (69 per cent) of firms reported a rise in their input costs, up from 48 per cent in March, and only two per cent said their costs had eased. Businesses said fuel surcharges were contributing to this rapid increase in costs.
Some construction companies said they are attempting to purchase raw supplies in advance of their use, because they fear that material and shipping costs could rise further.
Optimism Wanes Amid Uncertainty
Tim Moore, economics director at S&P Global, said: “Survey respondents cited a growing list of factors weighing on construction sector optimism, including fragile investment sentiment and elevated borrowing costs.” These worries were accompanied by “continued uncertainty about the impact of the Middle East conflict on prices, supply chains and broader economic prospects,” he said.
Huda As’ad, capital projects and infrastructure lead at Capital Projects, said: “The steep decline in output this month is a sharp reminder that the sector is still struggling to build sustained momentum. Persistent cost pressures, supply chain disruption and project delays are continuing to stall progress and dent confidence.”
Housebuilding Costs Soar
Builders have warned rising inflation caused by the Iran war comes on top of growing tax and policy costs. Around £76,000 has been added to the average cost of building a home since 2020, the Home Builders Federation (HBF) has warned. These extra costs include more than £7,000 in taxes and levies, over £23,000 in regulatory costs and £37,000 in increased material and labour costs.
The government has pledged to build 1.5m homes by the next general election, but housebuilders have warned this target is under pressure. Neil Jefferson, chief executive of the HBF, said: “The government’s ambition for new homes relies heavily on private home builders to deliver, yet it is not providing the conditions for these businesses to operate. While the industry supports the ambition behind some of these policies, there has been little consideration of their combined impact. The fact that house completions have remained slow clearly shows that planning reform alone is not enough and that other pressures are at play.”
