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Construction Sector Shrinks at Fastest Rate Since COVID Pandemic as Borrowing Costs Rise, Survey Shows

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Britain’s construction industry experienced its sharpest decline since the beginning of the COVID-19 pandemic, with rising borrowing costs being cited as a key factor, according to a survey conducted by the Royal Institution of Chartered Surveyors (RICS). The survey, published ahead of the Bank of England’s anticipated decision to maintain interest rates at a 15-year high, revealed that a net balance of 10% of respondents reported a decrease in activity between July and September.

This represents the lowest reading since the early months of the pandemic, and excluding that period, the last time the balance was this weak was in the third quarter of 2010. The decline was primarily observed in the home-building sector, while infrastructure and public works activity continued to show growth.

“The tougher environment around the housing market is now coming through in terms of a slowing in the build-out rate of new developments,” explained Simon Rubinsohn, Chief Economist at RICS. He further highlighted that this trend is expected to result in a decline in housing supply for at least the next year, exacerbating the challenges faced by first-time buyers and those looking to rent.

During the pandemic, the British property market experienced a significant boom, partly due to a tax cut for homebuyers and increased demand for larger homes. However, this surge has subsided following a series of interest rate hikes by the Bank of England.

As the central bank convenes on Thursday, it is anticipated that interest rates will be kept unchanged, signaling the intention to maintain high rates compared to the historically low levels of the past 15 years. This decision comes as the bank continues to grapple with inflation, which currently stands at nearly 7%.

The most recent official data reveals that construction output declined by 0.5% in August, although it was still 2.3% higher compared to the same period last year.

The contraction in the construction sector raises concerns about the state of the UK economy and the potential impact on employment. The significance of the sector cannot be understated, as it plays a vital role in job creation and economic growth.

However, it is worth noting that while the survey revealed a decline, there are indicators of resilience in other areas such as infrastructure and public works. This suggests that the construction industry’s challenges are not uniform across all sectors.

As the Bank of England considers its next steps, it faces a delicate balancing act between supporting economic recovery and managing inflationary pressures. The outcome of its decision will have far-reaching consequences for the construction industry and the wider UK economy.

It remains to be seen how the construction sector will navigate these challenging circumstances and whether policy interventions will be required to revive growth. The performance of the industry in the coming months will be closely monitored, as it is a key indicator of the overall health of the British economy.

More detail via Reuters here… ( Image via Reuters )

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