UK construction firms have seen activity in the sector decline for the first time since January 2021 due to pressure from soaring costs and higher interest rates, according to new figures.

The closely watched S&P Global/CIPS construction purchasing managers’ index (PMI) scored 48.9 in July, dropping from a reading of 52.6 in the previous month.

It also represented the worst reading since May 2020.

Anything above 50 is considered growth.

It was significantly below the expectations of analysts, with a consensus of experts compiled by Pantheon Macroeconomics predicting a reading of 52 for July.

July data illustrated that cost-of-living pressures, higher interest rates and increasing recession risks for the UK economy are taking a toll on construction activity

Tim Moore, economics director at S&P Global Market Intelligence, said: “July data illustrated that cost-of-living pressures, higher interest rates and increasing recession risks for the UK economy are taking a toll on construction activity.

“Total industry output fell for the first time since the start of 2021 as civil engineering joined housebuilding in contraction territory.

“Only the commercial segment registered growth in July, supported by strong pipelines of work from the reopening of hospitality, leisure and offices.”

The overall decline was partly driven by the worst performance by civil engineering firms for almost two years, as the category delivered a 40.1 reading.

Elsewhere, housebuilding fell for the second consecutive month, although it stayed at a similar level of decline as seen in June.

Commercial construction work remained in growth but once again saw this slow against the previous month.

Surveyed companies said they witnessed pressure on client demand due to “inflation, fragile consumer confidence and higher interest rates”.

Prices at historically high levels will continue to hamper activity in 2023

The report also highlighted that recruitment grew at an accelerated level in July but there were still reports of difficulties with filling vacancies and strong wage pressures.

Duncan Brock, group director at the Chartered Institute of Procurement & Supply (CIPS), said: “Builders’ optimism remained at the lowest levels seen for two years.

“Job creation was healthy to complete work in hand but the danger remains that, should the UK economy turn unfavourable, this will affect job hiring and the development of key skills.

“A feather-like fall in prices may ease some of the pain as access to raw materials also improved, but prices at historically high levels will continue to hamper activity in 2023.”