Last month, the UK construction sector recorded its sharpest fall in activity since the height of the Covid pandemic, driven by a steep drop in housebuilding. The figures underline the scale of the challenge for the Government as it seeks to deliver its target of 1.5 million new homes by the end of the current parliament.
Survey data showed that construction activity in July fell at the fastest pace since May 2020, during the first coronavirus lockdown. Residential building led the decline, but civil engineering also slumped while commercial property development showed a more minor but still notable contraction.
Based on feedback from around 150 construction companies, the survey is closely tracked by economic policymakers as an early warning indicator of wider performance. It comes against rising unemployment, stubborn inflation, shrinking economic output in April and May, and global trade disruption following the latest round of tariffs announced by the United States.
Sharp fall in housing activity
The headline index for UK construction fell from 48.8 in June to 44.3 in July, well below the 50 level that separates growth from contraction. The housing activity sub-index dropped from 50.7 to 45.3, reflecting the depth of the downturn in residential development.
The decline in activity raises new doubts over the Government’s housing pledge. Experts in the sector have warned that the 1.5m target is unlikely to be met, with some suggesting that the estimates for achievable new builds were overly optimistic.
In response, ministers have proposed a series of measures to boost construction, including changes to planning rules, proposals for new towns, and £39 billion of additional funding for social housing.
Industry headwinds intensify
Despite these initiatives, construction companies face significant barriers to growth. The industry struggles with labour shortages, while higher employment costs and stubborn inflation are weighing on investment decisions. The increase in employer national insurance contributions in April added to pressures, and speculation about further tax rises later this year adds uncertainty.
Business groups have cautioned that additional tax increases could undermine efforts to support economic growth. At the same time, analysts warn that the construction industry’s financial challenges risk delaying progress on major housing and infrastructure projects.
The broader economic picture adds to the concerns. Separate figures released earlier this month showed the UK services sector experienced its steepest drop in new orders in nearly three years. Together with weaker construction activity, these results indicate slowing momentum across large parts of the economy.
Forecasts also suggest that the Government’s public finances may face a shortfall of up to £50bn later this year. This would reduce the room for further spending measures to support growth or ease the pressure on businesses.
Policymakers remain hopeful that lower borrowing costs could provide some relief. Interest rates were recently cut, and financial markets are pricing in at least two further reductions by the end of 2026, bringing the base rate down to 3.5%. Lower rates ease economic pressure on households and businesses, potentially providing a modest boost to demand in the housing market.
For now, however, the construction industry is contending with one of its most difficult periods since the pandemic. With housing output falling, vacancies in the sector remaining hard to fill, and costs still elevated, the outlook suggests that meeting the Government’s housing target will be increasingly complex.
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