Construction activity hits a four-month high

A surge in housebuilding helped construction activity to grow at its fastest annual pace in four months in June, bucking expectations for a slowdown, industry data has revealed.

The monthly Markit/CIPS purchasing managers’ index (PMI) for the construction sector rose to 62.6 in June from 60.0 in May, its highest level since February and well above the forecast for a fall to 59.5.

Readings above 50 represent year-on-year growth in activity, and those below 50 point to contraction.

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The equivalent manufacturing survey on Tuesday also beat expectations, driving sterling to its highest level in nearly six years and bolstering expectations that the Bank of England would raise interest rates this year.

The construction survey showed the fastest pace in hiring in the sector since 1997.

“This represents a remarkable yardstick of progress as the sector looks to recover the ground lost over the past seven years,” said survey author Tim Moore.

Housebuilding was the fastest-growing sector, with the biggest pick-up in activity since January as rapidly rising house prices, low interest rates and strong demand encouraged developers to press ahead with projects.

Commercial real estate development also picked up speed, while the growth in civil engineering work slowed as flood-relief work earlier in the year dried up.

Mr Moore said that the construction PMI data over the second quarter pointed to the sector growing by more than 1 per cent over the three-month period.

Tom Vosa, chief economist at Yorkshire Bank, said: “Given that construction is worth around 7 per cent of total output, that would add 0.1 per cent to Q2 quarterly GDP growth.

“As such, it remains consistent with our 0.8 per cent GDP forecast, although we acknowledge that stronger manufacturing survey data and a possible rise in service sector activity would provide an upside risk.”

Official data released last week showed that construction output rose by 1.5 per cent in the first three months of 2014 and was 6.7 per cent higher than a year earlier - the biggest annual rise in three years.

The PMI figures pointed to ongoing momentum in the sector, with new orders coming in at the fastest rate since January.

Investors in construction companies also see bright prospects, after the BoE was less stringent than feared last week when it introduced measures to stop home-buyers borrowing more than they can afford.

The central bank has said that a shortage of new homes is the underlying reason for Britain’s fast-rising house prices, which have increased by around 10 per cent in the past year, and almost double that in London.

Mortgage lender Nationwide said yesterday that house prices rose by 1 per cent in June and were 11.8 per cent higher than a year earlier - the biggest annual rise since January 2005.

Prices in London in the second quarter of the year were 26 per cent higher than a year before.

Foreign money has poured into London property, seen as an attractive bet by everyone from Russian oligarchs to US technology titans, prompting a domestic scramble for homes that many locals cannot afford without potentially crippling debt.

Bank Governor Mark Carney has warned the housing market poses the biggest domestic risk to financial stability and signalled that Britain could be the first major Western economy to tighten monetary policy since the 2008 crisis.

He has also stressed that monetary policy will not be driven by house prices in its capital - and that the central bank does not target house prices or seek to use higher interest rates as its main tool for curbing rising household debt,

But the latest rises raise questions about how long this position can stand.

Business Secretary Vince Cable has called for action to tackle the overheating London housing market, warning that a premature rise in interest rates will hit the recovery in manufacturing.