Britain’s construction sector has recorded its worst run since the financial crisis almost two decades ago, with housebuilding mired in the deepest slump since the start of the Covid pandemic in 2020.
UK construction output shrank for the 12th month in a row in December, the longest unbroken run of declines since the global financial crash of 2007-09, although there were signs of optimism among companies, according to a monthly industry survey.
The purchasing managers’ index (PMI) from S&P Global and Cips had a headline reading of 40.1 in December, close to its five-and-a-half-year low of 39.4 in November. Any reading below 50 indicates contraction. Economists had predicted a slight improvement, to 42.5.
“UK construction companies once again reported challenging business conditions and falling workloads in December, but the speed of the downturn moderated from the five-and-a-half-year record seen in November,” said Tim Moore, an economics director at S&P Global Market Intelligence.
“Many firms cited subdued demand and fragile client confidence. Despite a lifting of budget-related uncertainty, delayed spending decisions were still cited as contributing to weak sales pipelines at the close of the year.”
The housebuilding subindex dropped to 33.5, the lowest since May 2020, when building sites were closed down after the Covid outbreak prompted the UK government to declare a nationwide lockdown.
The housing secretary, Steve Reed, acknowledged last month that a sharp increase in housebuilding was needed to meet Labour’s promise to build 1.5m new homes in England over five years. Housebuilders have predicted that the government will miss its ambitious target.
Output in the commercial sector also fell at the fastest pace in more than five and a half years in December, with the index at 42. While the downturn in civil engineering eased, it remained the weakest sector, reflected by a reading of 32.9.
However, construction companies became more optimistic about the outlook for the coming 12 months, and confidence hit its highest level since July, helped by the prospect of lower borrowing costs as well as the lifting of uncertainty about the contents of Rachel Reeves’s November budget.
The study showed 37% of companies polled predicted a rise in output levels during the year ahead, compared with 20% that forecast a decline.
Rising infrastructure spending and weaker inflationary pressure also prompted hopes of a turnaround.
New orders and employment declined in December, but to a lesser extent than in November.
The all-sector PMI – which comprises services, manufacturing and construction reports for December – edged up to 50.4 from 50.1 in November, pointing to a small expansion across the economy.
Elliott Jordan-Doak, the senior UK economist at Pantheon Macroeconomics, said: “We expect the construction PMI itself to remain subdued in the coming months, given how entrenched negative sentiment appears to be within the sector.
“Moreover, there are few reasons for businesses in the construction sector to be more cheerful. The budget’s prioritisation of higher welfare spending rather than investment will come as a disappointment to many builders, and the boost to activity from falling interest rates will be modest this year.
“Meanwhile, the chancellor’s mansion tax will exert further downward pressure on the housing market. So, we expect only modest growth in construction sector activity in 2026, with risks tilted to the downside.”
From April 2028, the government will introduce a high-value council tax surcharge – which has been labelled a “mansion tax” – for properties worth more than £2m in England, of £2,500 a year, rising to £7,500 for properties worth more than £5m. However, this was not as sizeable as feared by some.
UK house prices fell unexpectedly in December but have been tipped to rise as much as 4% this year by Nationwide building society. First-time buyers are expected to drive the housing market this year.
