Sector's slump a blow to recovery hopes

A FRESH slump in construction activity poses a threat to Britain's faltering economic recovery, economists warned after new figures showed the industry contracted for the first time since February.

The December construction index, published by Markit and the Chartered Institute of Purchasing and Supply, dropped to 49.1 from 51.8 in November, almost three times the drop analysts had expected, fuelling fears the sector will no longer be able to drive the recovery as it did for much of last year. Readings below 50 indicate contraction.

The survey compilers said poor weather had contributed to the decline. Only commercial construction activity managed to expand, and even here the rate of growth was the slowest in almost a year. House-building contracted at the sharpest rate since April 2009 and civil engineering activity also declined.

Howard Archer, at IHS Global Insight, said: "Even allowing for the hit to activity coming from December's severe weather, it is very clear that the economy cannot rely on a major contribution from construction going forward."

Sterling weakened slightly as investors bet that the sector's strong contribution to GDP growth in the second and third quarters of 2010 was unlikely to be repeated.

Although construction accounts for only around six per cent of the economy, the PMI index has proved a good leading indicator for GDP growth. Economists are warning of a marked economic slowdown this year as the rise in VAT and swingeing public spending cuts start to bite.

The economy expanded by 1.2 per cent in the second quarter of last year and 0.6 per cent in the third, but analysts are expecting a slowdown to 0.5 per cent in the fourth quarter and just 0.3 per cent in each of the first two quarters of 2011.

Simon Hayes, UK economist at Barclays Capital, said: "The outlook for the construction sector appears rather gloomy. Cuts in Government investment mean the civil engineering sector is likely to contract further and residential housing market remains torpid."

The forward-looking elements of the survey provided little cheer. New orders growth picked up marginally in December, but remained below its long-run average and employment in the sector fell sharply.