A stronger than expected recovery resulted in June for Britain’s construction sector, reversing a slowdown this year and pushing the Bank of England towards a rise in interest rates.
Construction ground to a virtual halt earlier in the year amidst heavy snow falls. Much better weather over recent months has helped builders bounce back.
A survey from IHS Markit and the Chartered Institute of Procurement and Supply, reports the largest upturn in buying construction materials for 30 months to June.
The rebound for the sector suggests that earlier weakness was down to the weather and not due to wider stagnation in the building trade.
The Bank’s MPC member Michael Saunders said the UK economy was continuing to grow at a modest and steady pace as has been the trend in recent years. he did caution that interest rates may need to rise and said “If the economy plays out as I expect, it may be that rates need to go up a little faster”.
The rate rise had been delayed after poor economic data following the bad weather earlier this year, although the Bank has since opened the door for an interest rate hike in August. The ONS also revised its estimates for growth in the first quarter, thanks to better readings from the construction industry, and said the economy grew by 0.2% in the first quarter, higher than earlier forecasts for growth of 0.1%.
Big-ticket infrastructure projects such as HS2 and Heathrow’s expansion are crucial to ensuring the UK remains an infrastructure leader across Europe and the world after Britain leaves the EU. Brexit uncertainty has meant businesses have stopped or held back on investment in recent months, which could make government spending key for encouraging firms to invest in Britain.
Particular strength was seen in the North-west, West Midlands and Bristol and optimism was generally stronger outside of London in the IHS Markit/Cips survey. House building drove much of the growth but fewer new projects for civil engineers prevented even stronger figures.
Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply. said “With the fastest rise in new orders since May 2017, it appears the brakes are off for the construction sector. Despite being hampered by economic uncertainty, firms reported an improved pipeline of work as clients committed to projects and hesitancy was swept away”.
Despite the better news, the outlook as Britain heads for the EU exit door still looks bleak according Samuel Tombs of the economics consultancy Pantheon Macroeconomics, who added that the proportion of builders expecting activity to increase over the next year remains was well below the 20-year average for the survey.
Max Jones of Lloyds Bank added “The sector is hardly motoring, with some large contractors blaming Brexit uncertainty for the delay or cancellation of projects.”
Still, it’s better news than expected and if the government can pull off a deal and avoid the cliff-edge of a no-deal Brexit, a boom in construction over the next decade is guaranteed.