The UK’s construction sector PMI for June was 48.8, slightly better than the expected 48.4. This marks six months of declining activity, although the decline is slowing down. New orders are dropping faster, leading to the lowest business optimism in two and a half years. Commercial activity decreased sharply, the worst in over five years, but house building showed some improvement. Residential work increased for the first time since September 2024, suggesting a bit of stability in demand.

Indicators of Economic Conditions

Forward-looking indicators fell from May, with new orders decreasing more quickly. This is due to tough domestic economic conditions and low client confidence. Expectations for business activity reached a two-and-a-half-year low, as firms faced fewer bidding opportunities. There is more competition for new work, and firms expect ongoing challenges due to low investment throughout the year. These elements create a tough outlook for the construction industry in the near future. These recent survey results indicate the sector is going through a difficult time. While the main figure was slightly above expectations, it still fell below the neutral 50 mark, which indicates growth versus contraction. Overall activity in construction firms is declining, though not as quickly as in the past few months. A concerning trend is the increased pressure on project pipelines. A notable drop in new work is an important indicator of future trends. For those closely watching the market, this continued downturn in new business shows that clients lack confidence to invest, leading to a dimmer outlook for firms. The optimism measure hit its lowest point since late 2021, not due to a specific event, but because of widespread fatigue in demand.

Competition and Pricing Implications

Traders have noticed that commercial projects are being heavily reduced. This area has experienced the steepest decline in five years. Developers are scaling back plans and holding off on bids. However, house-builders provided some hope. Residential work is picking up slightly, the first increase in nine months. While encouraging, this isn’t enough to uplift the entire sector. Inside the numbers, a significant drop in tender opportunities stands out. Fewer chances for construction firms to bid often lead to lower activity in the medium term. As project volumes decrease, competition intensifies, causing pricing to become more competitive. Firms may lower margins to secure work, creating operational pressure with direct pricing consequences. At the trading desk, it’s important to factor in ongoing pressure across input channels and tender quote adjustments. With low sentiment, clients’ risk appetite won’t change quickly. This might impact materials demand. If new contracts don’t materialize, procurement activity may slow, which could apply mild downward pressure on specific materials markets, especially those linked to non-residential projects. We’re also keeping an eye on labor dynamics. With fewer projects and more uncertainty in contracts, segments that rely on labor might see lower wage pressures, especially where subcontractors are involved. This could affect wage expectations tied to some pricing derivatives. One issue we’re monitoring is whether this competitive pressure leads to longer project completion times. If firms are spreading resources across fewer jobs, timelines could stretch. This isn’t favorable for project revenues, increasing the risk of delays, especially in multi-phase builds. We suggest reducing exposure to cyclical suppliers over the next two to three earnings periods. Overall, while a couple of areas have stabilized, the survey suggests no significant improvement. Long-term progress will depend less on sentiment and more on whether macroeconomic borrowing conditions ease. Until then, pressure will stay concentrated in commercial construction, with only modest support from housing. Create your live VT Markets account and start trading now.

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