Construction sector lifted by surprise rise in growth

The Markit/CIPS headline construction PMI index rose to 54.0 in May from 53.3 in April, beating forecasts for a reading of 53.6 and giving sterling a boost.

Economists said the figures suggested the sector grew in the second quarter and that it fared better between January and March than the four per cent decline reported by official data.

Firms were also more optimistic about future activity.

However, analysts have warned that Government spending cuts and fragile house prices are likely to cause delays in home building and other large construction projects.

“The survey shows decent but unspectacular activity,” said IHS Global Insight economist Howard Archer. “Nevertheless, the construction sector clearly faces a challenging environment, which is likely to limit activity over the coming months.

“In particular, the coalition Government’s extended pruning of public spending will clearly limit expenditure on public buildings, schools, hospitals and infrastructure, even though the Government is keen to prioritise some infrastructure projects.

“Furthermore, housing activity is still very weak compared to long-term norms, house prices are soft and the outlook for the sector remains worrying, so this could well weigh down significantly on house building as was indicated by only modest expansion in May.

“And if the economy continues to struggle for momentum over the coming months, commercial construction activity is likely to be hit with projects put back on hold.”

Richard Kendall, the head of policy and communications at Hull & Humber Chamber of Commerce, said: “The official figures have been all over the place recently and have had little relation to our members’ experiences on the ground. This seems to be a much more accurate reflection.

“Activity has picked up a little and some firms are starting to take people on again, but the outlook remains difficult.”

Mark Goldstone, head of business representation at the Leeds Chamber of Commerce, said: “This data is encouraging for the construction industry, which felt the brunt of the recession more than other sectors.

“The public sector cuts continue to have an impact and the chamber believes that commercial development will only provide limited opportunities for the sector.

“There is evidence of increased activity in the Leeds city region, where major development is taking place. Construction is already under way for the Leeds Arena, Trinity Leeds and the Heslington East campus at York University; and there are other large-scale projects potentially in the pipeline, such as the Terry’s of York site and Eastgate Leeds. However, we would like to see more long-term certainty.”

Markit said Government cuts contributed to the first fall in civil engineering activity for five months.

Commercial building was the strongest of the three sub-sectors for a second month running, while house building grew in May after a contraction in April.

There was a marked rise in new business as lengthy contract negotiations translated into new work, Markit said.

This led to the first increase in employment in the sector since June 2010.

Purchasing of materials increased for a fifth consecutive month in May at a rate broadly in line with that seen in April, pointing to a further increase in activity.

“The millstone of public spending cuts can be seen clearly (in the data),” said David Noble, chief executive at the Chartered Institute of Purchasing & Supply.

“It remains to be seen whether a marked expansion of commercial projects will help to replace what has been lost elsewhere.”

[email protected]