Commercial building slump sparks unexpected fall in construction activity

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Output in Britain’s construction sector unexpectedly fell last month as commercial building and civil engineering work continued to drag on the industry.

The Markit/CIPS UK Construction purchasing managers’ index (PMI) showed a reading of 52.2 in December, down from 53.1 in November and below economists’ forecasts of 53.1.

A reading above 50 indicates growth.

Despite the industry struggling to fire on all cylinders, housebuilding levels proved robust and new orders accelerated at the fastest pace since May.

However, these bright spots failed to inspire a cheerier outlook from firms, with the balance of companies expecting a boost to output levels in 2018 proving one of the weakest for four-and-a-half years.

The update comes as output in the UK manufacturing industry achieved “solid growth” last month, but eased back from a near four-and-a-half-year high when separate PMI data was released on Tuesday.

Tim Moore, IHS Markit’s associate director, said: “The UK construction sector achieved a moderate expansion of business activity at the end of 2017, although the recovery remained uneven and slowed overall since November.

“Construction companies indicated that another strong contribution from housebuilding helped to offset subdued civil engineering activity and reduced volumes of commercial work.

“Total new orders picked up at the fastest pace for seven months in December, which provides a positive signal for construction workloads in the short term.

“Resilient demand and forthcoming project starts also led to greater job creation and the strongest increase in input buying for two years.”

The number of new jobs being created across the sector touched its highest level since June, according to the report, which showed housebuilding work had grown for the 16th month on the bounce.

The boost came despite builders having to grapple with escalating costs, as the price of blocks, bricks, insulation and roof tiles all rose last month.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The construction sector ended 2017 on a weak note, and it likely will continue to struggle in 2018.

“On past form, the average level of the PMI in Q4, 52.0, indicates that construction output held steady, following two consecutive quarter-on-quarter declines.

“The official measure of construction output, however, was 2.5% below its Q3 average in October, so a further contraction looks likely.”

Sterling was marginally higher versus the US dollar at 1.359 following the announcement, while the pound lifted 0.1% against the euro at 1.128.

The Office for National Statistics (ONS) confirmed last month that gross domestic product (GDP) grew by 0.4% in its final reading for July to September this year, rising from 0.3% in the first and second quarters.

However, the UK economy is still struggling to bounce back to levels seen in the final quarter of 2016 – when GDP rose by 0.6%.

Howard Archer,  EY Item Club’s chief economic adviser, said: “Construction output contracted in both the third and second quarters of 2017, and there is a very real chance that a further drop in output occurred in the fourth quarter.

“While the purchasing managers’ surveys indicate modest growth in output over the fourth quarter, latest hard data show that output slumped 1.7% month on month in October.

“While a pick-up in new orders to a seven-month high in December offers some hope for construction going into 2018, it looks like it is going to be another challenging year for the sector.”

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