UK construction sector contracting as house-building slumps

Housebuilding slump triggers biggest drop in UK construction output since 2020

Newsflash: UK construction firms have suffered their steepest decline in output since May 2020.

Activity across the building sector shrank in September, the latest survey of purchasing managers at construction firms has found.

The decline was led by a “steep and accelerated fall in house building”, according to S&P Global who compile the report. Aside from the pandemic, the latest fall in housing activity was the steepest since April 2009 (when the global financial crisis pushed the UK into recession).

Shrinking order books contributed to another slowdown in employment growth and lower business activity expectations for the year ahead, the report shows.

It pulled the S&P Global / CIPS UK construction PMI index down to 45.0 in September, down sharply from 50.8 in August.

Any reading below 50 shows a contraction, and this is the fastest downturn since the first pandemic lockdowns hit the building sector.

Civil engineering activity also fell last month – a trend that could continue now that the northern leg of HS2 has been scrapped.

A chart showing UK construction PMI — Photograph: S&P Global

Tim Moore, economics director at S&P Global Market Intelligence, says:

“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 house building 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. Concerns about the domestic economic outlook also dampened client spending during September, which contributed to the fastest reduction in commercial building since January 2021.

The survey’s forward-looking measures once again remained relatively downbeat as order books decreased at an accelerated pace and business activity expectations eased to the lowest so far this year. Moreover, fewer project starts meant that sub-contractor availability increased to the greatest extent since the summer of 2009.

Lower demand across the supply chain contributed to a robust improvement in delivery times for construction productions and materials, alongside a stabilisation in purchasing costs during September.”

Key events

UK car sales jump 21% in September

UK car sales have risen for the 14th month running, but the share taken by electric vehicles has fallen.

A total of 272,610 new cars were registered in September, industry body the SMMT reports, which is 21% more than a year ago.

There was a large increase in company car purchases, with registrations by large fleets up 40.8% to 143,256. The SMMT says this is due to “market rebalancing” after last year’s supply problems.

The SMMT also flags that battery electric vehicle sales rose by 18.9%, with 45,323 drivers choosing BEVs over fossil-fuel powered cars.

But as this growth was less than the overall recorded by the market, BEV market share slipped back slightly to 16.6% from 16.9% a year ago.

Mike Hawes, SMMT chief executive, says the government must offer more incentives to encourage motorists to switch to electric cars.

📢”A bumper September means the new car market remains strong despite economic challenges. However, with tougher EV targets for manufacturers coming into force next year, we need to accelerate the transition, encouraging all motorists to make the switch”@MikeHawesSMMT pic.twitter.com/hnldRunT48

— SMMT (@SMMT) October 5, 2023

Amazon: We disagree with Ofcom’s findings

Amazon says it disagrees with Ofcom, but has pledged to work constructively with the CMA over its probe into the cloud market.

An Amazon Web Services (AWS) spokesperson said in a statement:

“We disagree with Ofcom’s findings and believe they are based on a fundamental misconception of how the IT sector functions.”

The boss of a UK cloud computing company has welcomed Ofcom’s decision to refer the industry to the competition authorities.

Mark Boost, the CEO of Civo said:

“I applaud this bold action from Ofcom. A referral to the Competition and Markets Authority (CMA) is an unprecedented opportunity to make the cloud market a truly competitive space. This means empowering any company to develop and grow cutting-edge cloud services, and ensuring customers can readily move around to find the best solution to match their needs.”

“The CMA’s broad enforcement powers opens the door to wide-ranging remedies. Action will need to be a balancing act. It will be particularly important to tackle egress fees, either through significant price controls or the most ambitious choice: abolishing them entirely. The price point charged on egress by hyperscalers is out of control, and creates huge practical and financial obstacles for customers to move to another cloud provider. Urgent changes are also needed to how hyperscalers structure their services to enable customers to reap the benefits of simultaneously accessing multiple different providers, as well as a review of the fairness of incentives for loyal customers.”

“This is only the beginning of an 18 month journey before we know the decision made by the CMA. In the meantime, this investigation can also be a spur for immediate action from industry. Emerging cloud providers are rapidly stepping up to offer an alternative way forward to the hyperscalers. This vision is founded on putting the needs of the user back at the heart of cloud computing: transparent, predictable pricing; a streamlined experience; and super-fast, reliable services across the board.”

Metro: We’re evaluating a range of options

A Metro Bank in London. Photograph: Hannah McKay/Reuters

Metro Bank has just issued a statement to the City, in which it “notes the recent press speculation regarding a potential capital raise”.

[As flagged earlier, there are reports that Metro is in talks about an urgent capital raise of £600m in equity and debt]

Metro says it “continues to consider how best to enhance its capital resources”, with particular regard to £350m of senior bonds that are due to be refinanced in October 2025.

It explains:

The Company is evaluating the merits of a range of options, including a combination of equity issuance, debt issuance and /or refinancing and asset sales. No decision has been made on whether to proceed with any of these options.

Metro also says that it continues to meet its minimum regulatory capital requirements, and is “well positioned for future growth.

Shares in Metro are currently down 25%, having dropped 29% at the start of trading.

Here’s George Dibb, head of the Centre for Economic Justice at the IPPR thinktank, on the competition probe into UK cloud computing:

Given the CMA’s recent judgements taking a more confrontational position on 21st century competition, this investigation will definitely be worth keeping an eye on https://t.co/8zaLxzc6Rv

— George Dibb (@GeorgeDibb) October 5, 2023

The bond markets appear to be rather calmer today than this time yesterday.

The yield, or interest rate, on UK 30-year government bonds has crept a little bit higher this morning. It is currently 5.033%, having ended Wednesday at 5.023%.

That small rise indicates that bond prices have slipped a little. But it still leaves yields below the 25-year high of above 5.1% hit yesterday morning.

Metro Bank shares fall 29% after reports it is seeking fresh capital

Ouch. In the City, shares in lender Metro Bank have tumbled by over a quarter at the start of trading.

Metro’s shares have fallen to around 36p, from 50p yesterday, following reports that it is considering raising hundreds of millions of pounds from investors.

Metro, whose market value had already halved during September, recently failed to persuade regualtors to allow it to lower the capital requirements attached to its mortgage business.

Oct 5 (Reuters) – Metro Bank shares tanked more than 25% on Thursday as investors dumped the stock after press reports said the British mid-sized lender is in talks for an urgent capital raise to bolster its balance sheet.

via @damasoni

— William James (@WJames_Reuters) October 5, 2023

The FT has reported that Metro is in talks about raising £250m in equity funding and £350m in debt.

Last night, before today’s share price plunge, the bank was valued at around £86m.

You can read Ofcom’s report into cloud computing here.

It includes this handy chart showing the structure of the cloud computing sector:

Photograph: Ofcom

As you can see, Amazon’s AWS, Microsoft’s Azure and Google Cloud are present at all levels of the cloud stack, and provide a wide range of cloud services across multiple product categories.

Full story: UK cloud computing market faces inquiry amid Microsoft and Amazon concerns

Dan Milmo

The UK’s communications regulator has referred the cloud computing market to the competition watchdog for a formal investigation after a study raised concerns about industry leaders Amazon and Microsoft.

Ofcom has asked the Competition and Markets Authority to launch an inquiry, saying it is “particularly concerned about the position of the market leaders Amazon and Microsoft”.

More here:

The CMA has various powers if it finds that competition is being threatened – it can force firms to change behaviour, such as the way they selll products.

It can also impose structural remedies – compelling companies to sell parts of their business to improve competition [as we saw when it forced Facebook to sell gif creation website Giphy].

CMA: We’re launching a market investigation into cloud computing

That was quick. Britain’s competition regulator has announced that it is indeed launching a market investigation into the supply of public cloud infrastructure services in the UK, following Ofcom’s referral.

The Competition and Markets Authority (CMA) says it has appointed independent panel members to an inquiry group, who will act as the decision makers on this investigation.

They will publish “an issues statement” soon, which will lay out the proposed focus of the CMA’s investigation, for consultation.

The CEO of the CMA, Sarah Cardell (who has already tangled with Microsoft over its takeover of Activision Blizzard) says:

We welcome Ofcom’s referral of public cloud infrastructure services to us for in-depth scrutiny. This is a £7.5bn market that underpins a whole host of online services – from social media to AI foundation models. Many businesses now completely rely on cloud services, making effective competition in this market essential.

Strong competition ensures a level playing field so that market power doesn’t end up in the hands of a few players – unlocking the full potential of these rapidly evolving digital markets so that people, businesses, and the UK economy can get the maximum benefits.

The CMA’s independent inquiry group will now carry out an investigation to determine whether competition in this market is working well and if not, what action should be taken to address any issues it finds.

Following Ofcom’s referral, we are investigating the supply of public cloud infrastructure services in the UK.

Cloud services allow remote access to computing resources on demand and over a network.

Read more: https://t.co/pOPX4F0Sn0 pic.twitter.com/7k3ikWBlE6

— Competition & Markets Authority (@CMAgovUK) October 5, 2023

Why Ofcom is concerned about cloud computing

It’s around a year since Ofcom announced it would examine the world’s biggest tech companies’ dominance in areas such as cloud computing, messaging and smart devices.

And today Fergal Farragher, the Ofcom director responsible for that market study, says it’s not clear that there is effective competition in the cloud computing world.

Farragher says:

“The cloud is the foundation of our digital economy and has transformed the way companies run and grow their businesses. From TV production and telecoms networks to AI innovations – all of these things rely on remote computer power that goes unseen.

Some UK businesses have told us they’re concerned about it being too difficult to switch or mix and match cloud provider, and it’s not clear that competition is working well. So, we’re referring the market to the CMA for further scrutiny, to make sure business customers continue to benefit from cloud services.”

Introduction: Ofcom refers UK cloud market to CMA for investigation

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

British media regulator Ofcom has called for an antitrust investigation into Amazon and Microsoft’s dominance of the UK’s cloud computing market.

Following a probe into UK cloud services, Ofcom has decided to refer the public cloud infrastructure services market to the Competition and Markets Authority for further investigation, it announced this morning.

Ofcom is concerned that it is hard for UK businesses to switch and use multiple cloud suppliers.

And it points the fingers at two of the largest tech giants, saying: “We are particularly concerned about the position of the market leaders Amazon and Microsoft.”

Amazon Web Services (AWS) and Microsoft had a combined market share of 70-80% in 2022, Ofcom says, followed by Google with a share of 5-10%. The vast majority of cloud customers use the services of these ‘hyperscalers’ in some form, Ofcom says.

A chart showing the UK cloud computing markets — Photograph: Ofcom

Ofcom says there are three areas of concern:

Egress fees. These are the charges that customers pay to transfer their data out of a cloud and the hyperscalers set them at significantly higher rates than other providers. The cost of egress fees can discourage customers from using services from more than one cloud provider or to switch to an alternative provider.
Technical barriers to interoperability and portability. These can result in customers needing to put additional effort into reconfiguring their data and applications so they can work on different clouds. This makes it more difficult to combine different services across cloud providers or to change provider.
Committed spend discounts. These can benefit customers by reducing their costs, but the way these discounts are structured can incentivise customers to use a single hyperscaler for all or most of their cloud needs, even when better quality alternatives are available.

As a result, Ofcom have now asked the CMA to carry out an independent investigation to decide whether there is an adverse effect on competition, and if so, whether it should take action or recommend others to take action.

Also coming up today

Some calm has returned to the financial markets after yesterday’s nervy bond sell-off.

Asia-Pacific shares are higher today, recovering from Wednesday’s losses, as concerns over high interest rates ease.

As we blogged yesterday, UK long-term borrowing costs hit their highest level in 25 years on Wednesday morning, while US Treasury yields hit a 16-year high. But the rout abated after a surprisingly small rise in US private sector payrolls was announced.

By the end of the day there was relief across financial markets, but for how long?

Jim Reid of Deutsche Bank says:

After a fraught start we saw bonds and equities rally back following a tough few days.

However, the recovery accelerated with bad employment data, so the answer to how to get out of the recent rout was clearly the return of bad news is good news.