UK Construction Activity Jumps but Impact on Sterling Limited

• Sharpest rise in total construction output so far in 2017
• Strongest upturn in incoming new work so far this year, linked to the resilient economic backdrop
• Increase in employment numbers and the most marked rise in input buying since November 2016
• Average cost burdens increased sharply in April, although the rate of inflation continued to moderate

The second of the week’s PMI data releases has revealed the UK's construction sector grew at a faster-than-expected pace in April.

Compilers of the report, IHS Markit and the CIPS, announce that activity rose to deliver a reading of 53.1 in April, ahead of the previous month's 52.2 which is the sharpest jump in 2017.

Economists had been expecting a read of 52.0.

The beat on expectations has not had a major impact on Sterling's levels against the likes of the US Dollar and Euro, in line with our expectations.

GBP/USD trades at 1.2925 at the time of writing while GBP/EUR is quoted at 1.1844.

We warned that it would require a big deviation away from analyst expectations to move the Pound owing to the relatively small size of the construction sector within the UK economy.

The construction sector has followed in the footsteps of the manufacturing sector and surprise to deliver an expectation-beating read and now all eyes turn to the important Services PMI due for release on Thursday.

The Services sector accounts for over 80% of UK economic activity and therefore the impact on Sterling would likely be more notable.

But keep in mind that the UK currency is not really looking at data at present and is taking its cue from elsewhere.  

“The Pound remains strong despite the rising Brexit tensions, as the UK is focused on Thursday’s local elections and June 8th snap election, where PM Theresa May will be seeking to consolidate and eventually to extend her power at the heart of the government. Many believe that a stronger support for Theresa May could result in more favourable Brexit negotiations for the UK,” says Ipek Ozkardeskaya, Senior Market Analyst with London Capital Group.

Construction PMI Confirm Sector Remains in Rude Health

Data revealed the sharpest rise in total construction output so far in 2017.

UK construction companies reported a solid start to the second quarter of 2017, helped by faster rises in civil engineering and residential building activity.

April data also pointed to the strongest upturn in incoming new work so far this year, which survey respondents linked to the resilient economic backdrop and a sustained improvement in client demand.

“With the biggest rise in new orders since the beginning of the year, the sector is in a strong preelection
position buoyed up by a hardy UK economy and strong client confidence. The housing sector offered up the best news recovering from last month’s minor blip and building on its strongest performance since the end of last year," says Duncan Brock, Director of Customer Relationships at the CIPS.

Employment growth rose to its highest since May 2016, though continued disquiet about the lack of highly-skilled labour availability persisted.

“It is extremely encouraging to see a spring bounce in construction output in April as the sector and wider economy defies the turbulence of the political environment. Strong employment growth last month is also promising and with manifesto commitments being solidified by the Parties, now is an opportune time for them to position tackling the skills crisis in construction as a key issue,” says Mark Robinson, Chief Executive of Scape Group.

Of concern was the continued rise in costs associated with importing equipment and raw materials with the longer-term decline in Pound Sterling seen as still having an impact.