November 2, 2011 11:24 am

Surprise pick up in construction activity

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The UK construction industry enjoyed rising activity and new orders last month; a rare piece of good news that suggests the economy is not suffering uniformly.

The purchasing managers’ index for the sector rose from 50.9 in September to 53.9 in October – the highest reading in five months – as work picked up on commercial building and civil engineering projects. House building activity declined for the fifth month in a row, but at a much slower pace than before.

Economists were surprised by the strong survey data, which came a day after the manufacturing PMI for October dropped to worryingly low levels and prompted some to warn the UK economy could be heading for another recession.

Howard Archer, economist at IHS Global Insight, said the survey was a “welcome and all too rare” positive surprise for the economy. However, he cautioned against reading too much into one month’s data. The construction sector only accounts for about 6 per cent of gross domestic product, though its volatility means it can often have an outsized influence on the overall rate of economic growth.

The construction survey’s sub-index for new orders rose from 49.35 in September to 53.99 in October while the quantity of purchases also rose. Construction companies also took on more staff, albeit only at a tentative rate.

However, the sub-index for business expectations dropped to its lowest level since December 2008. Markit, the company that compiled the survey, said respondents were uncertain about the continued strength of private sector demand, and about the effects of public spending cuts. Chris Williamson, an economist at Markit, said this suggested “the sector could slide back into recession unless confidence revives in coming months”.

In addition, input price inflation picked up again after hitting a ten-month low in September. Survey respondents cited higher fuel and raw material costs; some also mentioned an end to fixed-price agreements.

The week’s mixed messages will make a similar survey of the services sector, to be released on Thursday, even more important for those trying to discern where the economy is headed. This sector accounts for more than three quarters of GDP and its robust performance in the three months to September helped the economy to grow by 0.5 per cent.

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