Pound Sterling Faces Growth Warning Before BoE Decision/h2>
Pantheon economists warn that weak construction threatens UK growth, while rising costs complicate the Bank of England’s next steps and Pound Sterling’s outlook.
The Pound to Dollar exchange rate was trading at $1.3465 on Thursday, down 0.09%, with Pantheon Macroeconomics warning that a sharper construction downturn threatens fourth-quarter UK growth.
Pound Sterling was also slightly weaker against the Euro at €1.1987 ahead of the Bank of England’s policy announcement.
The S&P Global/CIPS construction PMI fell to 43.6 in October from 46.1 in September, well below the 46.5 consensus cited by Pantheon and further beneath the 50 threshold separating expansion from contraction.
Yet construction firms also reported a sharp increase in input costs, leaving policymakers with evidence of weakening demand alongside renewed inflation pressure.
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Construction points to a weaker fourth quarter
Pantheon said:
“We estimate that the headline activity index of the construction PMI is consistent with output falling by around 1.5% three-months-on-three-months, down from the latest official reading of -0.9% in August.”
That is a signal about one sector’s output, rather than a forecast that the entire economy will shrink by 1.5%.
Pantheon acknowledges the survey’s uneven record:
“The PMI is volatile and has been consistently too downbeat on growth for periods of time before.”
“But the survey has-worryingly-become a better guide to actual output recently, so we have to take the October drop seriously and consider it a downside risk to our GDP growth forecasts for Q4.”
New orders also weakened.
“The forward-looking balances of the PMI match those poor fundamentals and suggest activity will remain weak for some time.”
Its economists added: “Borrowing costs are high and have further to rise, while energy prices look set to remain higher-for-longer, despite the small drop in recent days.”
Housebuilding disappoints as costs climb
The housing activity balance dropped to 35.1 from 40.7, its second-lowest reading since the pandemic, according to Pantheon.
Its economists said:
“That fall looks a little erratic to us and probably reflects some overoptimism around the Government’s “first home” scheme in September, before the full details were announced.”
Even smoothing out that volatility leaves a weak picture, with the three-month average housing index at 44.7, comfortably below the expansion threshold.
Meanwhile, the input price balance rose to 74.5 from 63.9, a four-month high.
Pantheon said: “Higher input costs are passing through to subcontractor rates too, despite weak demand, with that balance jumping to 59.4, from 53.9 and the second-highest since April 2023.”
That combination makes the report awkward for the BoE: weaker activity has not yet prevented businesses from facing higher bills, but raising borrowing costs further would add to the pressure on an already struggling sector.
On employment, Pantheon said:
“One glimmer of comfort came from the employment balance barely moving despite the broader signal of activity dropping sharply.”
The balance nevertheless remained below 50, indicating continued job losses rather than a return to hiring.
What This Means for Pound Sterling
For GBP/USD, the construction report adds evidence to the debate over whether the BoE will endorse an extended series of rate increases.
If policymakers emphasise the damage higher borrowing costs are doing to activity, investors could become less willing to price further tightening, reducing interest-rate support for Pound Sterling.
GBP/EUR faces the same domestic constraint, even when movements in the US Dollar dominate GBP/USD.
Rising construction costs could keep the BoE cautious about inflation, but they do not establish that demand across the wider economy is strong enough to withstand several more hikes.
The immediate test is the Bank’s November decision and accompanying assessment, due later on Thursday.
Its guidance should help establish whether policymakers regard construction’s weakness as a sector-specific problem or a warning that tighter policy is restraining the wider economy.
