Builders suffer setback after January output falls

Markit's Chris Williamson said activity is slowing. Picture: Contributed

BRITAIN’S construction sector has suffered an unexpected blow with output falling at the sharpest monthly rate in more than a year as housebuilding activity faltered.

Official figures yesterday revealed that output shrank by 2.6 per cent in January compared with the previous month, which the Office for National Statistics (ONS) said reflected a 5 per cent drop in housing after a large decline in the number of mortgage approvals for purchase.

The figures came as a surprise to City economists, particularly as a recent survey for the Chartered Institute of Procurement & Supply showed a healthy rate of growth in the construction sector.

There have been plenty of signs of recovery in an industry that was laid low by the recession, when scores of businesses and thousands of jobs were lost.

Construction firms and housebuilders have reported recovering profits and renewed contract activity. However, there was a setback earlier this week when Dundee construction business Muirfield Contracts was placed into administration, sparking the loss of 258 staff and the termination of work for 110 labour-only sub-contractors.

The ONS said yesterday: “Taken together, the factors constraining demand such as weak mortgage lending and high house prices, coupled with those constraining supply such as skill shortages and tight funding conditions, may have limited construction output growth in January 2015.”

Construction output is now 3.1 per cent below the level of a year ago, which is the first time that a year-on-year decline has been registered since May 2013.

Markit economist Chris Williamson said: “It seems like activity in the sector is set to slow this year, led down by a cooling housing market. Companies also look to be reining in their investment spending, hitting growth of commercial construction.”

However he said there were signs that the situation was not as bad as portrayed by the official figures, with dividend distributions to shareholders among homebuilders in the FTSE 350 set to rise by around 50 per cent this year.

He added: “Healthy dividend pay-outs indicate that the sector is still in rude health and faring really rather well.”

Howard Archer, chief UK economist at IHS Global Insight, the forecasting consultancy, described the ONS data as a “double whammy of disappointing news”, referring to the falls in housebuilding and overall output.

He said: “There is a very real risk that construction output will contract in the first quarter of 2015 and be a drag on GDP growth, as it was in the fourth quarter of 2014.

“Much will depend on how well the dominant service sector performs and how much construction output and industrial production can rebound in February and March.”

He added: “It should be noted that the disappointing construction output and orders data are notably at odds with recent decent survey evidence on the construction sector from both the purchasing managers and the Bank of England’s regional agents.

“There are still grounds for optimism on the construction sector over the coming months.”

The dip in housebuilding output may fuel concerns that the UK is constructing too few new homes to keep up with demand.

A report this week from the Royal Institution of Chartered Surveyors showed UK house prices rose more strongly than expected last month, although major mortgage lender Halifax pointed to a slight cooling.

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