UK Construction Unexpectedly Expands in July

on Aug 3, 2012
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A recent purchasing managers’ index (PMI) survey showed that the UK’s construction activity expanded in July, Reuters reported on August 2. Although the survey results indicate only marginal growth, they nevertheless come as a relief, given the generally negative UK economic data of late.

The survey by Markit Economics and the Chartered Institute of Purchasing and Supply (CIPS) registered a recovery in the construction PMI, which rose to 50.9 in July from June’s two-and-a-half year low of 48.2. In addition, it was higher than economists’ estimates for a further decline to 48.0.
Despite the observed sector growth, new orders received by construction companies recorded their second-biggest drop since January 2010, although the fall was less steep than it was in June. According to the Markit/CIPS press release, respondents cited a lack of new opportunities to tender and a general weakness in underlying market demand. Growth on the other hand was largely confined to the commercial subsector, with house building and civil engineering activity declining.

!m[](/uploads/story/226/thumbs/pic1_inline.png)“July’s survey offered little sign of an imminent rebound in the UK construction sector, with total activity rising only marginally after well documented temporary factors had weighed on output last month,” comments Tim Moore, senior economist at Markit and author of the Markit/CIPS PMI.
Yet, as noted in the Reuters article, the PMI results are nevertheless a slight relief especially considering that the previous day a similar survey showed that manufacturing activity had contracted at its fastest rate in three years.

It seems, however, that the generally negative data about the UK’s economy is causing experts to doubt any positive news, with the Financial Times reporting that economists as well as industry groups have expressed scepticism about the construction PMI survey results. The FT quotes Noble Francis, economics director at the Construction Products Association, who noted that the latest PMI numbers did not square with data from members of his trade body. “Construction has been suffering since the end of last year due to the sharp cuts in public sector capital investment from government and a very subdued private sector, adversely affected by poor consumer and business investor confidence,” he pointed out. The PMI figures come just weeks after the Office for National Statistics reported that output in Britain’s construction sector contracted by approximately 10 percent in the first half of 2012.

The Markit/CIPS PMI however had a short-term positive impact on the sterling with Bloomberg reporting that the pound erased its loss against the greenback immediately after the report was published before slipping back.
On August 3, Markit/CIPS released a PMI for the UK services sector, showing that in July, activity declined from 51.3 to 51, marking the slowest growth for the sector for 19 months. Yet, according to the FT, the PMI suggested that the service sector was in a much better shape in July than the manufacturing sector. “Taking the manufacturing, construction and service sector PMIs together they are consistent with an economy that is flatlining rather than one that is in the midst of an intensifying recession,” points out the ING economist James Knightley, as quoted by the FT.

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