Chill winds in construction may push UK further into recession

A FRESH battering for the construction sector is likely to have pushed Britain into an even deeper recession, economists warned yesterday.

Official figures pointed to a much sharper decline in output from building companies during the first quarter of the year than previously thought. The revision is expected to account for a further 0.1 percentage point of GDP contraction.

A string of more optimistic business surveys in recent weeks had raised hopes that an initial reading of GDP, showing that the UK had slid back into recession in Q1, would be revised upwards later this month.

Extremely weak construction output was the main drag in the opening three months of 2012, contributing to an economic contraction of 0.2 per cent after a 0.3 per cent fall late last year.

Chris Williamson, chief economist at business research group Markit, said: “If these official data are correct, it paints a very worrying picture of the health of the UK economy, especially in relation to infrastructure investment.”

The construction sector’s woes intensified yesterday as almost 240 jobs were axed in the Highlands and Islands and Central Belt by administrators for Inverness-based UBC Group.

Accountancy firm Zolfo Cooper, who took over the running of the building firm earlier this week, said its “financial position as a whole was unsustainable”. It is closing a string of subsidiaries but hopes to find a buyer for UBC’s Wyvis Roofing unit, which would save 30 jobs.

Construction firms are struggling for traction following the last recession, though a number of major housebuilders have recently pointed to signs of a recovery.

The Office for National Statistics said the total volume of construction output fell by 4.8 per cent in the first quarter compared with the previous three months, down from the 3 per cent decline previously flagged. As a sub-sector, infrastructure witnessed the largest decrease at 15.9 per cent.

However, the extent of the construction slump surprised some in the City.

Investec economist Philip Shaw said: “Mechanically, this would result in a downward revision to GDP to -0.3 per cent on the [first] quarter from -0.2 per cent, but there are significant questions over the accuracy of the construction data and numbers have to be taken with a very large pinch of salt.

“Most outside estimates of the construction sector suggest that it is contracting, but nothing like the scale shown by the official figures.”

Separate figures yesterday showed that manufacturing firms are passing on a bigger-than-expected proportion of past increases in their costs to customers. So-called factory gate prices rose by 0.7 per cent month-on-month in April and have now risen by 2.3 per cent in the first four months of 2012.

The Bank of England is trying to keep a lid on inflation, and earlier this week held back from printing more money in an effort to boost economic activity.

Governor Sir Mervyn King said recently that the economy was recovering slowly and steadily, though many economists expect him to leave the door open for further quantitative easing when he presents new growth and inflation forecasts next week.

Howard Archer, chief UK economist at IHS Global Insight, said: “The dismal and perplexing construction output data for the first quarter adds to the MPC’s dilemma as it faces weak economic activity and sticky inflation.”

4.8% Total volume of construction output

15.9% Infrastructure sector output

6.9% Total volume of new work

Source: ONS, Q1, quarter-on-quarter