The S&P Global/CIPS construction Purchasing Managers’ Index (PMI) registered 45.5 in August, an improvement on July’s five-year low but still indicating a significant downturn.

August data indicated that a slower reduction in commercial building (index at 47.8) helped to offset steeper declines in residential (44.2) and civil engineering activity (38.1). The latest reduction in output across the house building category was the sharpest since February.

Civil engineering was the weakest-performing segment in August, with business activity decreasing at the fastest pace since October 2020. Survey respondents again commented on a lack of new projects to replace completed work.

Total new orders across the construction sector decreased for the eighth month running in August, although the rate of decline eased to the least marked since January. Construction companies widely commented on challenging market conditions, intense price competition and headwinds from sluggish UK economic activity.

Lower volumes of output and incoming new work led to hiring freezes and the non-replacement of departing staff in August. Employment numbers have fallen throughout 2025 to date and the latest reduction was the fastest since May. A number of firms commented on efforts to mitigate rising payroll costs by cutting back on recruitment. Subcontractor usage also decreased markedly in August and at one of the fastest rates seen over the past five years.

A lack of forthcoming project starts led to a solid reduction in purchasing activity across the construction sector. The latest decline in input buying was the sharpest for three months.

Jordan Smith, regional director at Thomas & Adamson, part of Egis Group, said: “Although August’s PMI reading shows a slightly slower pace of decline than July’s five-year low, the construction sector continues to contract rather than grow, meaning it is a challenging market for everyone to navigate through. Reductions in housing and civil engineering sectors continue to be experienced; however, commercial projects have offered some resilience as we have seen first-hand as we are actively engaged on a number of commercial and workplace schemes.

“With the Bank of England’s interest rate being cut to 4% in August, the cost of borrowing is at the lowest level for more than two years, so there is cause for optimism that signs of movement could be on the horizon as the cost of finance becomes slightly more attractive to developers. This all helps with viability of potential projects, together with other positive emerging signs such as steadying of purchase prices and shorter lead times for materials, which we hope to see sustained as activity picks up towards the end of 2025.

“Whilst the data also notes a freeze on new hires, this is not necessarily the case across the board. Thomas & Adamson and the wider Egis Group are committed to recruiting and developing the next generation of talent within our businesses, and have several new hires on the horizon.

“The Scottish Government has this week announced a fresh commitment to invest £4.9bn in new homes over the next four years. This should hopefully create new momentum north of the border, and be reflected in the data seen throughout the remainder of the year.”

Brian Smith, head of cost management at AECOM, added: “An increase in August’s activity, despite remaining below the 50.0 mark, paints a more encouraging picture for the sector. However, even as the pace of decline has eased, firms will be looking for a longer-term stabilisation in new orders before adding capacity to their books.

“In this environment, contractors should keep a tight grip on cash flow and costs, act early if challenges emerge, and remain realistic about risks so they are not caught off guard if market conditions deteriorate. The government’s return from recess will be key as it looks to implement a new 10-year infrastructure plan, backed by £725 billion of public investment. However, ambition alone won’t be enough.

“Unlocking projects, accelerating delivery and providing the certainty required for long-term planning will only be possible if the public and private sectors work in partnership to convert investment into tangible outcomes that reshape the UK’s economic and social landscape.”

According to Matt Swannell, chief economic advisor to the EY ITEM Club, the data points to a challenging environment.

He said: “Though August saw the construction PMI edge up from July’s five-year low, a reading of 45.5 was still consistent with a substantial contraction in activity.

“All three sub-sectors – residential, commercial, and civil engineering – had readings that were well below the 50 ‘no change’ mark, though the commercial sector showed greater signs of resilience than the other two.”

Mr Swannell also noted a curious break between the survey data and official figures, suggesting sentiment is playing a key role. “That relationship appears to have broken down this year, with official output growth strengthening as the construction PMI has declined… it’s likely to be heavily influenced by shifts in business sentiment following the changes in employer National Insurance Contributions (NICs) and the international trading environment.”

Joe Sullivan, a partner at MHA, which has offices in Edinburgh and Aberdeen, echoed this sentiment, stating: “The pace of decline in the construction sector eased slightly in August; however, the PMI remains below 50, highlighting a continued slowdown in activity and investment in the face of a climate of policy uncertainty and increased financial pressures.”

The primary obstacle to recovery, according to Mr Sullivan, is the current political climate and speculation over future tax policy.

He explained: “The ongoing rumours of a new SDLT and a ‘mansion tax’ are creating a significant drag on the property market. This policy uncertainty is already stalling investment across the UK.

“Further speculation over a national property tax, changes to CGT and IHT, and a potential new NI charge on rental income are causing would-be investors to delay decisions and are already impacting transaction volumes. The Autumn Budget being delayed until 26 November is therefore unhelpful. There is also an indirect potential hit to construction volumes as potential changes to pension taxation could reduce investment in property funds.”

He added: “The current tax system, particularly Stamp Duty, is a structural drag on the market. It discourages both up-sizers and down-sizers, creating a lack of mobility that is bad for everyone. By disincentivising people from moving, it not only reduces transaction volumes but ultimately lowers overall tax receipts.”

Despite the headwinds, there are positive factors that could support a future recovery. Jordan Smith, regional director at Thomas & Adamson, pointed to the recent cut in borrowing costs as a reason for cautious optimism.

“With the Bank of England’s interest rate being cut to 4% in August, the cost of borrowing is at the lowest level for more than two years, so there is cause for optimism that signs of movement could be on the horizon as the cost of finance becomes slightly more attractive to developers,” Mr Smith said. He added that this helps project viability, “together with other positive emerging signs such as steadying of purchase prices and shorter lead times for materials”.

UK and Scottish Government investment is also providing a crucial support pillar. Mr Swannell noted that “higher government investment and plans to increase housebuilding should support demand”, while Mr Sullivan highlighted that “major infrastructure projects like the Lower Thames Crossing remain a positive driver”.

Looking at a regional level, Mr Smith added: “The Scottish Government has this week announced a fresh commitment to invest £4.9bn in new homes over the next four years. This should hopefully create new momentum north of the border, and be reflected in the data seen throughout the remainder of the year.”