UK residential construction output sees fastest growth since June 2010

The UK construction industry expanded by much more than expected in July, according to the purchasing managers’ index (PMI) released by the Chartered Institute of Purchasing & Supply and Markit Economics.

Construction PMI was 57.0 in July, up from 51.0 the month before (a number above 50 indicates growth, below indicates contraction). Analysts were expecting to see 51.6. This is the fastest rate since the middle of 2010.

Higher levels of business activity were recorded in all three broad arteas of the construction sector monitored by the survey. Residential building activity was the strongest performing category, with output growth at its steepest since June 2010.

The good data follows news from Nationwide that house prices rose 3.9 per cent year-on-year in July, up from a 1.9 per cent annual increase the month before, and yesterday's Markit PMI data showing the UK construction industry grew at its fastest rate in over two years.

Analysts at IHS Global Insight said they would be lifting their forecast for UK GDP to 1.2 per cent in 2013 and 1.9 per cent in 2014. Its chief UK and European economist Howard Archer said:

More good news for the UK economy, with the construction sector seemingly increasingly shrugging off its long-term problems and now contributing to growth. This is significant as the construction sector has been a recent serious drag on UK economic activity despite its relatively small size.

With the purchasing managers reporting that both manufacturing and construction activity improved markedly further in July, it is looking ever more likely that the economy can achieve further decent growth in the third quarter after GDP growth doubled to 0.6% quarter-on-quarter in the second quarter from 0.3% quarter-on-quarter in the first. A robust July purchasing managers’ survey for the dominant services sector (out on Monday) would really help matters further.

On the news, sterling rallied, but there was no reaction from the FTSE, which is still being bogged down by the negative reaction to RBS results.

Tim Moore, senior economist at Markit and author of the PMI report, commented:

July’s survey highlights a new wave of optimism across the UK construction sector, with companies reporting a pace of expansion in excess of anything seen over the past three years. The swing back to output growth broadened to include commercial and civil engineering activity during July, although housing construction remains the one thing crucial to the sector’s strong upturn at present.

Construction firms saw the fastest improvement in new orders for over a year, which helped kick-start job creation and input buying growth during July. A switch to sharply rising purchasing activity may have caught some suppliers by surprise, as delivery times lengthened to the greatest degree in over seven years.

Chief executive of the CIPS David Noble added:

Homes are the beating heart of this rapid recovery in the construction sector, backed by a solid expansion in civil engineering and commercial activity. Better economic conditions, a jump in new business activity and the strongest level of confidence since the era of austerity began in 2010, strongly suggest this growth can be sustained into Q3.

This rising confidence goes hand in hand with increasing output, underpinned by the expansion in new business orders, which was the steepest since April 2012. As a result, firms are starting to believe this is the real deal for the recovery, demonstrated by the strongest pace of job creation since December 2011.

One constraint on the sector is the pressure on suppliers to meet the sharp rise in demand. Suppliers have been surprised by the speed and scale of the revival leading to lengthy delivery times due to a shortage of capacity based on hard learnt lessons over the past few years. This will be something to watch in the coming months.