Construction sector shines out from the gloom

BRITAIN'S construction industry continued to grow last month, with improved confidence and new orders, although employment levels fell for the second successive month, figures yesterday revealed.

Optimism rose among the nation's builders after hitting a six-month low in June, with more firms believing they would be busier over the coming year.

The relatively upbeat findings contrast with recent weak data for manufacturing and retailing that raised fears of a further slowdown of an already feeble economic recovery.

IHS Global Insight chief UK economist Howard Archer said: "Following a recent flurry of disappointing surveys and data, it is actually somewhat of a relief to see construction activity expand at a similar pace in July to June.

"However, the construction sector is hardly storming ahead and it clearly faces a challenging environment over the coming months, which is likely to limit growth prospects."

The Markit/Cips purchasing managers' index (PMI) for the sector ticked down to 53.5 points in July from 53.6 a month earlier, beating analysts' expectations of a fall to 53. Any reading above 50 denotes expansion.

Markit stressed that the degree of confidence among manufacturers was still weak compared to the past. However, new business rose for the 17th successive month.

Sarah Bingham, economist at the research firm, said: "The subdued level of confidence regarding future business expectations reflects the challenging outlook for the UK economy and, therefore, the construction sector."

The fall in employment largely reflected firms not replacing staff, Markit added, though there were some redundancies. Civil engineers saw the sharpest increase in activity over the past month, the survey revealed, while residential construction contracted for a second month due to the weak housing market.

The construction industry was a major drag on economic growth over the winter, even though it accounts for only about 6 per cent of UK economic output, and despite solid PMI surveys. However, the sector returned to growth in the second quarter.

Overall, the economy barely grew between April and June, hit by a number of one-off factors. Recent surveys have indicated that the start of the third quarter was rather weak, with this week's manufacturing PMI showing its first contraction in two years.

The construction figures provide a rare slice of good news for Bank of England officials as they gather to decide on the next move for interest rates.

Members of the central bank's monetary policy committee were today beginning a two-day meeting at which they are widely expected to hold borrowing costs at their historic low of 0.5 per cent. Policymakers are having to balance the risks of rising inflation with an economy that shows signs of stalling.

Those inflation concerns were eased after the British Retail Consortium (BRC) said overall shop price growth had moderated last month. The fall to a year-on-year rise of 2.8 per cent from 2.9 per cent in June was triggered by a sharp decline in food inflation, from 5.7 per cent to 5.2 per cent.

The easing in food bills came as retailers continued to slash prices to draw in cash-strapped consumers, while good crops of seasonal fresh fruit and vegetables helped boost supplies.

BRC director general Stephen Robertson said: "The fall in overall shop price inflation came almost entirely from food."