Construction in the UK falls at steepest pace this year
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UK construction activity declined sharply in July, marking the fastest rate of contraction so far this year. Weighed down by high interest rates and a subdued commercial property market, the industry’s performance is raising concerns about the broader economic outlook heading into the final quarter of 2025. According to the latest S&P Global/CIPS UK Construction Purchasing Managers’ Index (PMI), the sector posted a reading of 45.2, falling well below the 50 mark that separates growth from contraction. This is the lowest figure recorded in eight months, signalling intensifying pressure across key parts of the industry.
Commercial sector leads the decline
Commercial construction continued its downward trend, performing worse than both residential and civil engineering sectors. Survey respondents pointed to client hesitancy, longer project approval cycles, and a lack of new investment as core issues. Office developments, in particular, have slowed as hybrid working patterns reduce the need for new space in major urban centres.
Retail construction is also under strain as consumer spending patterns shift, and companies scale back physical footprints. With demand for commercial space weakening and planning bottlenecks unresolved, developers are retreating, compounding the sector’s struggles.
Interest rates remain a critical barrier
The construction industry continues to feel the impact of the Bank of England’s sustained interest rate policy. Since August 2023, the base rate has remained at 5.25 percent, the highest level since before the 2008 financial crisis. The policy, aimed at curbing inflation, has made borrowing more expensive for both developers and prospective homeowners.
For private contractors and SMEs, tight credit conditions are stalling progress. Access to affordable finance for new builds and refurbishments has deteriorated, with lenders imposing stricter terms and higher security requirements. This financial pressure is evident in the slowdown of new project starts, as many firms choose to delay or cancel planned developments until market conditions improve.
Public infrastructure spending slows
Civil engineering, which includes government-backed infrastructure projects, also reported a drop in output. Delays to major schemes such as the HS2 high-speed rail extension and several regional transport upgrades have created uncertainty within the supply chain.
Budget constraints at the local authority level are resulting in paused school, hospital, and road improvement plans. These hold-ups are not only reducing monthly activity levels but are also disrupting workforce continuity and procurement cycles, making it harder for firms to plan ahead with confidence.
Cautious outlook for the months ahead
Expectations for the rest of the year suggest the sector will continue to adjust to current conditions rather than rebound sharply. Firms are focusing on cost control, efficiency, and targeted bidding to navigate the ongoing pressures. While short-term growth is unlikely, stable activity in residential projects and smaller-scale refurbishments may offer limited support. Construction businesses are responding pragmatically, anticipating that sustained performance will depend more on adaptability than policy shifts in the immediate term.
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