UK Construction PMI Rises as Industry Blindsides Pundits with Fourth Consecutive Gain

-Construction PMI rises from 53.1 to 55.8 vs consensus of 52.8.

-Fourth consecutive upside surprise underlines gradual recovery.

-Construction has been UK's most beleaguered industry of late.

© aallm, Adobe Stock

The IHS Markit UK Construction PMI surprised on the upside for a fourth consecutive time in July, appearing to confirm that a recovery is underway in one of the UK's most beleaguered economic sectors.

The construction PMI rose to 55.8 for the month of July, up from 53.1 previously, when consensus forecasts had suggested a decline to 52.8 was in order. The index had fallen to 47.0 in March 2018 marking its lowest ebb since July 2016, the month immediately after the UK voted to leave the European Union. 

This marks the fourth consecutive upside surprise for the index and appears to have drawn a line under an industry recession that had made a substantial contribution to the UK economic slowdown seen during the first-quarter and 2017 as a whole. 

"Survey respondents noted that a general improvement in client demand had led to successful contract negotiations on larger scale projects. Despite an upturn in tender opportunities, construction companies are cautious about the year-ahead business outlook," says IHS Markit. 

A broad based increase in activity across residential construction, commercial project work and civil engineering were behind July's sharp increase in activity, although it was the housebuilding sector that led the recovery, with output here rising at its fastest pace for around two and a half years. 

Commercial construction and civil engineering segments, which were at the heart of the 2017 construction industry recession, both saw a sustained although-lesser improvement in activity during the recent month. But new order growth remains weak in both segments even though new orders for the industry overall rose strongly in July.   

Above: Construction PMI and industry output. Source: Pantheon Macroeconomics.

"The pick-up in the construction PMI to a 15-month high in July is a surprising development, given the continued deadlock in Brexit talks," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. "The outlook for the commercial sector still is highly sensitive to Brexit talks and continued uncertainty throughout the second half of this year likely will cause many firms to delay expansion plans."

PMI surveys measure changes in industry activity by asking respondents to rate conditions for employment, production, new orders, prices, deliveries and inventories. A number above the 50.0 level indicates industry expansion while a number below is consistent with contraction.

Markets care about the PMI data because, covering the UK's three largest commercial sectors, they are an important indicator of momentum within the economy. And economic growth has direct bearing on the rate of inflation and it is consumer price pressures that dictate where interest rates, which are the raison d'être for most moves in exchange rates, will go next.

The construction industry has been a drag on UK economic growth during the last year and, according to Office for National Statistics data released at the end of June, shrank by -0.8% during the first quarter. Previously the ONS said the industry contracted 2.7% but more complete data showed this to be an overstatement.

Nonetheless the slowdown in the industry, brought about by earlier weakness commercial construction activity, weighed on the broader economy at the start of the year when UK GDP growth slowed from 0.4% at the end of 2017 to just 0.2% for the three months to the end of March.

The first-quarter economic slowdown, and a steep decline in UK inflation, led the Bank of England (BoE) to abandon the idea of an interest rate rise in May. This dented the Pound and left markets looking to the August meeting for the next possible move. The Bank of England raised its interest rates to 0.75% at 12:00 London time Thursday.

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