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UK construction activity expands again

UK construction activity continued to increase during June, and at a strong pace. The seasonally-adjusted Markit/CIPS Construction Purchasing Managers' Index (PMI) posted 58.4, which was broadly in line with the previous month's reading of 58.5.
This signalled a marked strengthening in UK construction activity, which was supported by a further rise in new business. All of the three broad UK construction sub-sectors showed a rise in activity during June.

Following the trend of recent months, residential construction was the strongest performing of the three categories, with a substantial expansion signalled during the month. Moreover, growth in housing activity was the sharpest since December 2003.

The increase in civil engineering activity also accelerated during June, and was the strongest in 27 months. Civil engineering has been the weakest performing of the three sub-sectors in recent months, although expanded at a slightly faster rate than commercial-based construction in June.

The latest rise in commercial activity was solid, although slowed for a second successive month and was lower than the long-term average for the series.

A further increase in new business received by construction companies in the UK boosted the rise in overall activity during the month.

The rate of new order growth slowed moderately since May, indicating some consolidation of the strong expansions recorded in the previous two months.

Nonetheless, the latest increase remained above the historical average for the series.

Despite sustained increases in new work and activity, employment within the UK construction sector was broadly unchanged during June. Efforts to expand capacity at some companies was offset by continued cost-cutting measures at others.

Subcontractor usage increased marginally, although at a weaker pace than in the previous month.

Meanwhile, input prices faced by constructors rose substantially during the month. Panellists commented that rising raw material prices continued to drive input cost inflation.

Nonetheless, purchasing activity increased for a fourth consecutive month and, at a marked rate, as constructors responded to higher site requirements.

Subsequently, suppliers' delivery times lengthened during the month, reflective of reduced capacity at vendors.

UK construction companies remained optimistic regarding their outlook for future business activity during June.

However, confidence fell to the greatest extent in the survey history. Panellists commented that, while they expect ongoing improvements in the wider economy to lift the sector, they remain concerned about public spending cuts and the VAT rise scheduled for 2011.

'The June UK construction PMI data signalled another strong increase in activity but, with new orders expanding at a weaker pace, there is a possibility of reduced growth in activity,' said Sarah Ledger, economist at Markit and author of the UK Construction PMI.

'Perhaps the most significant story arising from the data this month was the large knock to confidence. While sentiment overall remained positive, a number of construction companies were more bearish about future activity, with some concern expressed over the implications of public spending cuts and the VAT rise scheduled for 2011. This was highlighted by ongoing reluctance to add to workforces, despite the sustained expansion in activity,' she added.

'Although the UK construction sector maintained a steady pace of growth in June, question marks loom over the sustainability of this recovery in the longer-term,' maintained David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply.

'Most tellingly, modest rises in order books did little to boost employment levels and confidence over future activity dropped. Meanwhile, curbing inflation continues to be a big issue facing firms and from our experience they are likely to be nervous about offsetting their higher costs by passing them on to clients.

'The sector is also bracing itself for another spell of troubled times following the public spending cuts and forthcoming VAT rises announced by the government last month.

'A stark reminder of just how hard this sector has been hit is the handful of cranes currently dotting the skyline and the half-finished construction projects. Recovery in the second half of the year is likely to remain fragile and we are still a long way off seeing the industry operate the way it did pre-recession,' Noble added.

For more information or to buy the full report contact sophie.jarvis@markit.com
2 July 2010

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