Scotland economy: Strength matter for cheer: Ian McConnell

A fall in civil engineering activity in September, revealed by this survey, made for grim reading. It is something the Conservative Government should heed, although the Tories seem to be keener at the moment on reining in infrastructure spending. Only last week, they announced the scrapping of the previously planned HS2 high-speed rail link from the West Midlands to Manchester.

And something else of great concern in the survey from CIPS and S&P Global was the precipitous nature of the fall in UK housebuilding activity.

While not surprising, given the UK’s inflation crisis and consequent surge in interest rates, the extent of the plunge is a real worry.

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CIPS’s housebuilding index came in at 38.1 in September. This is way adrift of the 50 mark deemed to separate expansion from contraction, and signals very sharp decline.

Aside from the pandemic, the latest fall in housebuilding activity is the steepest since April 2009, in the depths of the global financial crisis.

CIPS noted: “Survey respondents widely commented on cutbacks to housebuilding projects amid rising borrowing costs and weak demand conditions.”

UK base rates have surged from a record low of 0.1% in December 2021 to 5.25%. The Bank of England’s Monetary Policy Committee held UK base rates at 5.25% at its September meeting, after a long, long run of rises.

The overall business activity index for construction in the survey from CIPS and S&P Global fell from 50.8 in August to 45 in September on a seasonally adjusted basis. The September reading signalled the sharpest decline in the sector’s output since May 2020, during the lockdown arising from the coronavirus pandemic. The fall in construction activity in September was the first drop in three months. The commercial property construction sub-sector also saw a decline in activity in September, after solid growth during the summer.

Tim Moore, economics director at survey compiler S&P Global Market Intelligence, said: “Output levels declined across the UK construction sector for the first time in three months during September and the latest downturn marked the worst overall performance since the early stages of the pandemic.

"A rapid decline in housebuilding activity acted as a major drag on workloads, with construction companies widely commenting on cutbacks to new residential development projects in the wake of sluggish demand and rising borrowing costs.”

John Glen, chief economist at CIPS, said: “The impact of high mortgage rates and low house-buying demand continues to flow through the supply chain and negatively hit the UK construction industry. It has been a tough year for residential construction and the sharp decline in September shows the pressure on the sector is still a long way from easing, despite the pause on the raising of interest rates.”

The housebuilding sector does indeed look to be facing difficult times.

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The pressure on the broader UK private sector economy is meanwhile clear from survey evidence from CIPS and S&P Global signalling contraction in combined manufacturing and services activity in August and September.

In terms of Scotland’s position, the construction sector north of the Border is clearly being affected by many of the same forces as its counterparts in other parts of the UK.

Scottish construction market activity fell for a third consecutive quarter in the three months to June, “with all sub-sectors seeing either flat or falling workloads”, according to a monitor published by the Royal Institution of Chartered Surveyors in early August.

RICS chief economist Simon Rubinsohn said of the UK picture: “Feedback to the Q2 survey shows the rising trend in base rates is leading to increased financial pressures in the construction industry. This is not anticipated to lessen any time soon and is also reflected in the cautious assessment regarding the outlook for profitability…The survey provides further evidence of the challenges in delivering residential developments at the current time.”

Kevin Robertson, of K R Developments Group in Edinburgh, said: “Higher interest rates are impacting on project viability and construction costs.”

Amid the gloom, the latest PMI (purchasing managers’ index) report published this week by Royal Bank of Scotland did thankfully have some relatively good news for Scotland.

This may seem like an odd assessment of the situation given this report showed that business activity in Scotland’s private sector fell for the first time since January.

However, Scotland was the second-best performer among the 12 UK nations and regions in September in terms of its private sector economy, with only London managing to eke out growth in business activity last month.

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And only Scotland and Northern Ireland recorded growth in private-sector employment last month.

The rise in employment in Scotland’s private-sector economy in September was the eighth consecutive monthly increase.

Scotland’s business activity index, which covers manufacturing and services, fell from 50 in August to 49.3 in September on a seasonally adjusted basis, signalling a marginal decline. The 50 mark is deemed to separate expansion from contraction. The decline in business activity UK-wide was steeper, with this index dipping to 48.5 in September.

And September was no flash in the pan for Scotland in terms of its relative resilience.

In August, when activity in the private sector north of the Border stagnated, Scotland was in joint-third spot among the 12 UK nations and regions, behind only London and Wales.

It is good to see Scotland doing even better in relative terms in September, of course.

Given how grim the UK economic backdrop is, Scotland’s relatively strong showing should surely bring some cheer to anyone who is genuinely passionate about the nation’s prosperity.

It is important that people realise how robust and resilient the Scottish economy is proving to be, given that the political mudslinging north of the Border might leave some with the impression that the nation was the worst-performing part of the UK, not the second-best.