UK construction activity remains under pressure, with output contracting for a tenth consecutive month in August 2026. However, the pace of decline has moderated, while a stronger-than-expected manufacturing performance provides a more mixed picture of the wider economy. The latest figures point to continued weakness in construction investment, particularly new work, even as pharmaceutical production and other manufacturing subsectors support industrial activity.

For sterling, the combination of resilient manufacturing and persistent construction weakness creates competing signals. The outlook will depend on whether stronger production can translate into broader economic momentum, or whether subdued construction and uneven services activity continue to constrain growth.

Market Snapshot

• Annual construction output: Down 1.8% in August, compared with a revised 1.9% decline in July and expectations for a 1.6% fall.
• Monthly construction output: Fell 0.2%, easing from a 0.5% decline in July.
• New construction work: Down 5.8% year-on-year and 0.7% month-on-month, highlighting persistent weakness in new projects.
• Repair and maintenance: Increased 3.6% annually and 0.8% monthly, providing a partial offset to falling new work.
• Manufacturing production: Rose 1.2% month-on-month, exceeding expectations for a 0.1% decline.
• Annual manufacturing growth: Reached 3.0%, the strongest increase since March 2024.
• UK trade balance: The deficit narrowed to £0.92 billion in August, its smallest since January, as exports edged higher and imports declined.

UK Construction: New Work Remains the Main Weakness

Construction output fell 1.8% year-on-year in August, extending the sector’s contraction to ten consecutive months. Although the annual decline was slightly smaller than July’s revised 1.9% fall, it remained deeper than market expectations.

The underlying figures show a clear divide between new work and repair and maintenance. New work contracted for an eleventh consecutive month, falling 5.8% annually, while repair and maintenance expanded by 3.6%. On a monthly basis, repair and maintenance rose 0.8%, but new work declined 0.7%, marking its fifth consecutive monthly fall.

Total construction output decreased 0.2% month-on-month, the smallest decline in four months. Nevertheless, output fell 1.0% over the three months to August, with both new work and repair and maintenance recording declines over that period.

The figures suggest that the sector has yet to establish a sustained recovery. Continued weakness in new projects remains a concern, while the resilience of repair and maintenance offers only a partial counterbalance.

Manufacturing Provides a Counterweight

UK manufacturing delivered a stronger signal, with production increasing 1.2% month-on-month in August after a revised 1.0% rise in July. The result comfortably exceeded expectations for a 0.1% decline.

Nine of the thirteen manufacturing subsectors recorded growth. Pharmaceutical production made the largest positive contribution, rising 5.1% and accounting for more than half of the overall monthly increase in manufacturing. Textiles and wearing apparel advanced 0.9%, while wood and paper products rebounded by 3.2%. Chemicals and chemical products also returned to growth.

Not all subsectors shared the improvement. Food products, beverages and tobacco declined 1.0%, while coke and refined petroleum products fell 1.8%.

Annual manufacturing production increased 3.0%, its strongest growth since March 2024 and above the forecast of 2.3%. This performance provides evidence of resilience in parts of the industrial economy, although the contribution from pharmaceuticals means the breadth and durability of the improvement will remain important to monitor.

UK Trade Deficit Narrows

The UK’s trade deficit narrowed to £0.92 billion in August, down from a revised £2.32 billion in July. The result represented the smallest deficit since January, when the trade balance recorded a surplus.

Total exports increased 0.1% month-on-month to £82.33 billion, while imports declined 1.5% to £83.25 billion. Services exports rose 0.4% to £46.15 billion, offsetting a 0.1% decline in goods exports. On the import side, goods purchases fell 2.4% to a seven-month low.

A narrower trade deficit may provide some support to the growth outlook, but one month’s improvement does not establish a sustained change in external demand. Future export performance, import trends and the contribution of net trade to economic growth will remain relevant for sterling.

Bullish Scenario for Sterling

Sterling could find support if stronger manufacturing activity continues, the improvement in the trade balance is sustained and broader economic indicators point to firmer domestic momentum.

A recovery in new construction work would strengthen this outlook by suggesting that investment-related weakness is beginning to ease. If industrial production remains resilient while services activity improves, expectations for UK growth could become more constructive and provide support for the pound.

Under this scenario, traders would look for confirmation from upcoming GDP, production, trade and business activity data rather than relying on a single positive manufacturing report.

Bearish Scenario for Sterling

Sterling could face renewed pressure if construction output continues to contract and weakness in new projects spreads across other areas of the economy. The tenth consecutive month of falling annual construction output highlights the risk that investment-related activity remains subdued.

The manufacturing rebound may also prove insufficient to offset weakness elsewhere, particularly if its gains remain concentrated in a limited number of subsectors. A deterioration in services activity or a reversal in the trade balance improvement could further weaken the growth outlook.

If upcoming data reinforce concerns about economic momentum, markets could reassess expectations for UK monetary policy, adding another source of volatility for the pound.

UK Economic Forecast: What Comes Next?

The near-term outlook remains mixed. Manufacturing is providing a meaningful source of support, while construction continues to struggle with a prolonged decline in output, particularly in new work. The narrower trade deficit offers an additional positive development, but its sustainability has yet to be established.

The next phase of the outlook will depend on whether industrial strength broadens across the economy. A sustained recovery would require more than strong manufacturing figures: construction activity would need to stabilise, services would need to contribute more consistently, and external trade would need to maintain its recent improvement.

For sterling, the direction of travel will depend on the balance between these competing forces and how they influence expectations for UK growth and interest rates.

Market Outlook: What to Watch Next

• UK GDP: Look for evidence that economic growth is broadening beyond manufacturing.
• Construction output: Monitor whether the monthly decline eases further and whether new work begins to recover.
• Manufacturing production: Assess whether recent gains extend to more subsectors rather than relying heavily on pharmaceuticals.
• Trade balance: Watch whether export growth and lower imports continue to narrow the deficit.
• Services activity: A more consistent contribution from services would help confirm a broader improvement in economic momentum.
• Bank of England expectations: Changes in growth and inflation prospects may influence market pricing for future monetary policy and sterling.

Currency Hedger View

The UK data present a mixed picture for businesses with sterling exposure. Stronger manufacturing and a narrower trade deficit offer potential support, but persistent construction weakness leaves uncertainty around the durability of the recovery.

Importers and exporters should avoid treating one positive data release as a definitive signal for future exchange-rate direction. Instead, businesses can monitor incoming economic indicators, assess the sensitivity of their cash flows to GBP movements and consider whether forward contracts or other appropriate hedging arrangements fit their payment schedules and risk tolerance.

Currency Hedger monitors foreign exchange markets alongside broader commodity and macroeconomic conditions, helping businesses assess and manage their international currency exposure.

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Analysis: Louis Roche, Today Markets

Disclaimer: This article is for informational and educational purposes only and does not constitute investment, financial or trading advice. Currency markets and related financial instruments involve significant risk. Economic forecasts and market scenarios are conditional and may not materialise. Businesses should assess their own circumstances and seek appropriate professional advice before making financial decisions.