International Finance
Economy

UK construction grows in April, concerns remain

Growth is at slowest pace for six months, though beats analysts predicting a lower figure, reports Team IFM London, May 7: UK construction companies continued to record strong output rises during April for the 12th straight month but at their slowest pace since October, with all three broad categories of activity registering robust growth, independent data released late last week showed. The CIPS UK Construction...

Growth is at slowest pace for six months, though beats analysts predicting a lower figure, reports Team IFM

London, May 7: UK construction companies continued to record strong output rises during April for the 12th straight month but at their slowest pace since October, with all three broad categories of activity registering robust growth, independent data released late last week showed.

The CIPS UK Construction Purchasing Managers’ Index or PMI, a measure of the country’s house building sector prepared by economy tracker Markit for the Chartered Institute of Purchasing and Supplies, said despite the overall rate of sectoral expansion, it had eased since March and was the least marked for six months.

This was highlighted by the seasonally adjusted PMI dipping from 62.5 to 60.8 in April, Markit said. The latest reading was nonetheless much higher than the 50.0 no-change threshold and well above the long-run survey average of 54.3.

It was also beyond industry forecasts, which some analysts had pegged lower at 62. A survey of 17 economists by Bloomberg News had predicted the PMI to fall to 62.2.

Two factors seemed to be fuelling the current stretch of construction sector expansion – the wettest winter in 250 years necessitating new building and repair work, and a general economic wellbeing. For instance, the first quarter saw a growth of 0.8 percent, data from the Office of National Statistics showed.

This, however, was a tad lower than that forecast, primarily because of contraction in mining and production activities.

Tim Moore, Senior Economist at Markit and author of the CIPS survey report, noted in his summation that construction growth has started to moderate from the rapid pace seen over the winter. “But strong rises in new work and payroll numbers provide ample optimism that output will expand strongly over the course of 2014,” Moore added.

Similar views were put forward by Howard Archer, chief UK and European economist at IHS Global Insight. British broadcaster BBC quoted him as saying that while construction industry growth eased in April, the growth figure was still “very strong” and that the sector looked “well positioned for much improved expansion in the second quarter”

STRONG PERFORMANCE

Higher levels of construction output have now been recorded for 12 months running. Residential construction was the best performing broad area of activity, and the rate of expansion in April remained one of the fastest seen over the past 10 years.

Moreover, the current 15-month period of continuous house building growth is the longest since 2006-07. Commercial activity increased sharply in April, while growth of civil engineering activity eased markedly and was the slowest since September 2013.

Survey respondents noted a range of positive influences on new business volumes, particularly increased numbers of new housing starts, higher levels of public sector infrastructure spending and improving underlying economic conditions.

“The latest survey pointed to a steep and accelerated rise in new business received by UK construction companies, with the pace of expansion the fastest since January,” Markit said.

CIPS Chief Executive David Noble said while the rate of growth slowed slightly in April, the construction sector is still experiencing a remarkably strong and consistent period of expansion.

“House building was again the leading light in April, with growth now running for the longest continuous period since 2006-2007. This was further supported by a solid expansion in commercial activity.”

But some firms noted a moderation in the boost to civil engineering activity from work related to flood relief.  Noble noted that alongside the upsurge, civil engineering showed some signs of moderation, as companies looked for new work to replace flood relief activity.

“Reflecting the fast pace of growth filtering through the supply chain, vendor performance in April continued to deteriorate, typified by shortages of capacity, low stocks and worsening lead times,” he said. “Beyond this, the easing of cost inflation this month was acknowledged to have brought some relief to the industry.”

However, housing shortage continued despite the growth, forcing house prices to jump by 10.9 percent year-on-year in April, marking the first time since April 2010 that annual growth has reached double figures, according to mutual financial institution Nationwide.

“Improving house building is particularly welcome news given that a shortage of properties is a major factor repeatedly putting upward pressure on UK house prices,” said Archer of IHS Global Insight.

“Nevertheless, the fact remains that there needs to be extended, very strong house building to make significant inroads into the problem.”

DOMINO EFFECT

On the positive side, April data pointed to a steep rise in construction sector employment, which extended the current period of job creation to 11 months.

Increased payroll numbers were widely attributed to greater output requirements and confidence about the outlook for business activity.  “Positive news abounds as housing activity reached a near ten-year high and the sector as a whole benefited from the sharpest rise in new business since January this year,” said Noble of CIPS.

This, alongside improving economic conditions, continued to drive strong job creation, giving further cause for optimism about the future.

Markit said the latest survey indicated that construction firms’ confidence regarding the business outlook was only slightly lower than the seven-year high posted in March. “Around ten times as many construction companies (56 percent) anticipate a rise in output as those that forecast a fall over the next 12 months (5 percent),” it said.

According to it, the strong demand for inputs was highlighted by a further sharp increase in purchasing activity among construction firms. Higher levels of input buying have been recorded in each month since June 2013.

Meanwhile, Markit said, input cost inflation eased slightly to a three-month low in April. Survey respondents widely cited higher prices for raw materials such as bricks and timber.

What also helped were better economic conditions, a surge in house building, improved access to finance and greater investment spending are all important tailwinds for UK construction growth this year, said Markit economist Moore.

“April’s survey indicated that residential building was the fastest growing area of UK construction activity, with the latest expansion correlating with at least 45,000 new housing starts per quarter,” Moore added.

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