Thursday 2 February 2017 11:28 am

Output in the UK's construction industry grew unexpectedly slowly in January

The pound fell off its highs this morning after figures revealed output in the UK's construction industry had grown unexpectedly slowly  in January – suggesting the sector's tentative recovery is swiftly running out of steam.

Markit's purchasing managers' index for the construction industry dropped to 52.2 in January, from 54.2 in December and against expectations of 53.8. Any figure below 50 denotes a contraction in the industry. 

Having edged above $1.27 in early trading, the pound fell as low as $1.264 against the dollar after the figures were published.

The index showed all three of the industry's sub-sectors recorded lower sales in January – and although housebuilding remained the best performing category, its expansion was the weakest it's been in five months.

However, the survey also suggested business confidence among construction firms was enjoying a "sustained improvement", with 51 per cent of firms forecasting a rise in activity over the next year, while just seven per cent expected a fall. 

Read more: The first sign Brexit could have seriously damaged commercial real estate

"The weak pound continued to have an inflationary impact on the UK construction sector in January," said Tim Moore, senior economist at IHS Markit. 

"Purchasing costs increased at the strongest rate for almost eight and a half years, as suppliers sought to pass on higher prices for commodities and imported construction materials.”

Running out of steam

"The mini-revival in construction activity, prompted by relief among firms about the short-term fallout from the Brexit vote and the boost to housing demand from the monetary policy committee's interest rate cut in August, already has run out of steam," added Samuel Tombs, chief UK economist at Pantheon Macroeconomics.  

"Despite… confidence among construction firms about the outlook… we doubt that demand will meet builders’ expectations," he added.

"Businesses will remain reluctant to invest while the government continues to tout the possibility of a 'cliff-edge' Brexit which would lead to a sudden impairment of UK firms' access to the single market.

"In addition, demand for new homes will likely deteriorate this year as high inflation squeezes households’ real incomes and as lenders reflect the recent pickup in funding costs in mortgage rates."

Read more: UK commercial construction hit a rough patch in 2016, falling 15 per cent