December slump brings more woe to construction

The Markit/CIPS Construction Purchasing Managers’ Index (PMI) fell to 48.7 last month from 49.3 in November.

It surprised analysts by dipping further below the 50 level that separates growth from contraction. Economists had forecast a reading of 49.5. The index is now at its lowest level since June, when terrible weather and extra public holidays affected output.

“December rounded off a miserable year for the UK construction sector,” said Tim Moore, the senior economist at Markit who is the author of the survey. Mr Moore noted that there had been weak underlying demand.

Residential building work shrank at the fastest pace since December 2010, when heavy snow disrupted construction work.

“Survey respondents are also relatively subdued about the 2013 outlook, amid reports from their clients that budgets will be under even greater pressure over the year ahead,” Mr Moore said.

According to the PMI, British construction output contracted in two of the three final months of 2012, despite hopes that the sector would boost the economy in the fourth quarter.

Although construction accounts for less than seven per cent of Britain’s GDP, weak activity in the sector was the main drag on the economy last year.

It helped tip the country into its second recession since the financial crisis.

Howard Archer, the chief UK and European economist at IHS Global Insight, said: “While the construction purchasing managers’ survey has not always been the most accurate indicator for the health of the sector, and activity may well have been hit in December by the very wet weather, the weakness of the survey provides a reminder the sector still faces a very challenging environment.”

Mr Archer said the latest hard data showed that construction output “spiked up” 8.3 per cent month-on-month in October.

Mr Archer said that October’s jump in construction output was likely to have been largely a correction. Construction output suffered a drop of 2.5 per cent quarter-on-quarter in the third quarter of 2012.

This followed falls of 2.8 per cent quarter-on-quarter in the second quarter, and 6.4 per cent, quarter-on-quarter, in the first quarter.

Mr Archer added: “As a result, construction output was down a massive 11.2 per cent year-on-year in the third quarter. It was also still down by 5.1 per cent year-on-year in October, despite the month-on-month surge.”

Other survey evidence also suggests that construction activity is weak, Mr Archer added.

The Bank of England’s regional agents observed in their December report that construction output continued to decline through 2012, and remained at low levels.

Mr Archer added: “Some regions, however, were starting to see a moderation or stabilisation in the rate of decline. This tended to reflect a modest improvement in private sector activity in some areas, which was partially offsetting continued contraction in public sector demand.

“There was some improvement in infrastructure projects, particularly those related to energy and rail.”

October’s sharp jump in construction output means that the sector may have expanded overall in the fourth quarter of 2012.

Mr Archer added: “The construction sector will be fervently hoping that the economy can see sustained growth in 2013 and that this stimulates building work.

“The sector will also be hoping desperately that the Government comes up with more support and initiatives to lift activity on top of the limited help provided in the Autumn Statement.”