Labour’s ambition to "build, baby, build" and deliver 1.5 million new homes within the current Parliament faces significant headwinds as the UK construction sector contracts for the ninth consecutive month. The latest Purchasing Managers' Index (PMI) for the construction industry registered 46.2 in September, slightly up from 45.5 in August but still well below the 50 threshold that marks expansion. This prolonged downturn, the longest since the pandemic, reflects deep uncertainty linked to the upcoming Budget and an adverse business environment.

The construction sector's persistent shrinkage comes amid fears of tax increases expected in the November Budget, which have sapped industry confidence and investment appetite. Employment in construction has also declined for the ninth straight month, marking the worst run since the Covid crisis. S&P Global Market Intelligence’s economics director, Tim Moore, observed that firms face pressure on multiple fronts while sentiment remains subdued with no clear turning point yet in sight. Despite official data showing a modest 1.0% rise in construction output in the second quarter of 2025, the PMI data depict ongoing challenges for the sector where financial pressures continue to weigh heavily.

The slump in construction contrasts sharply with Labour’s housing targets and wider economic ambitions. Housing Secretary Steve Reed remains committed to ramping up building activity, but firms are grappling not only with fiscal uncertainty but also with broader structural issues. Recruitment difficulties are acute — a recent survey by the British Chambers of Commerce found that 82% of construction and engineering firms reported major hiring challenges, up sharply from 69% earlier. The sector’s workforce crunch is compounded by the legacy of Brexit and the pandemic, which have disrupted labour supply and training pipelines.

Further, the government’s broader targets for economic growth through infrastructure investment rely heavily on the construction industry, which contributes about 6% to GDP. Yet confidence in the sector is at its weakest since late 2022, with only about a third of firms optimistic about output growth over the next year. The slowdown is particularly marked in house-building and civil engineering, both hit by weak demand, intense price competition, and cautious client spending. High borrowing costs and rising input prices add to the strain. These headwinds echo earlier steep contractions seen as recently as February 2025, when house-building output plummeted to levels not seen since the global financial crisis.

While some optimism surrounds anticipated public investment in infrastructure and energy security that might stimulate demand, firms remain cautious, deferring major capital commitments. The upcoming Budget is viewed as a potential turning point, pending clarity on tax policy and incentives to support construction activity. Labour’s broader economic strategy, focused on growth and public services, depends heavily on reversing these trends. However, persistent uncertainty, workforce shortages, and cost pressures mean the path to achieving the ambitious home-building goals is fraught with difficulty.

Meanwhile, the manufacturing sector also faces contraction, marking a significant recent decline partly due to weak demand and high operating costs. This highlights a broader pattern of subdued business confidence across key UK industries, tied to both domestic fiscal policy and global economic uncertainties.

In summary, the UK construction sector’s ongoing contraction underscores the complexity of Labour’s housing ambitions. Achieving the government’s targets will require navigating fiscal uncertainty, addressing severe labour shortages, and stimulating demand, amid a challenging cost environment. The situation calls for coordinated policy responses not only in taxation and public spending but also in workforce development and immigration to ensure the sector can meet its crucial role in the UK’s economic recovery and growth.

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Source: Noah Wire Services