Disappointing construction figures in May raise fears of a fragile UK recovery

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BRITISH construction output suffered a steep fall in May, raising the prospect that overall economic growth may fall short of expectations in the second quarter.

The surprise contraction adds to some signs that the pace of Britain’s rapid recovery over the past year may be easing, a trend which analysts said could see the Bank of England waiting until next year to raise interest rates. Construction output dropped by 1.1 per cent in May after rising by a similar amount in April, hurt by slow-downs in private-sector home-building and commercial work.

In the three months to May, output suffered its biggest drop since October 2012, declining by 0.8 per cent, while annual growth slowed to a six-month low of 3.5 per cent, the Office for National Statistics said.

Construction only accounts for six per cent of British economic output. But since late last year it has been an important driver of economic growth as government incentives, low interest rates and a sharp rise in house prices have boosted home-building.

Now some economists believe that the weak numbers - twinned with data this week that showed the sharpest one-month drop in factory output in over a year - may mean second-quarter economic growth fails to match the first quarter’s 0.8 per cent rate.

“Today’s data will add to concerns that ... the economic situation in the UK is starting to wobble after a glowing period in which almost all data have been largely positive,” said Scott Corfe, an economist at consultancy CEBR.

Royal Bank of Scotland cut its forecast for second-quarter growth to 0.8 percent from 0.9 per cent after the data. Deutsche Bank said that even 0.8 per cent could be tough.

Sterling fell slightly on the data and British government bond prices cut losses as markets pared bets on the Bank of England raising interest rates this year.

“Policymakers will be encouraged to err on the side of caution about hiking interest rates too early in what looks to be a still-fragile recovery,” said Chris Williamson, chief economist at data company Markit.

The ONS had no specific explanation for the weakness in private-sector construction, which pre-dates the most recent steps by the Bank to limit how much most Britons can borrow when they purchase a home. The data contrasts with private-sector surveys.

A purchasing managers’ index published by Markit showed the fastest construction growth in four months in June. Other data has suggested that Britain’s housing market is slowing.

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