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Construction activity hits eight-month high despite weak pound pushing up costs

Published 02/12/2016

The cost of building materials rose due to the slump in the pound's value
The cost of building materials rose due to the slump in the pound's value

Construction activity hit an eight-month high in November, but building costs have soared as the Brexit-hit pound continues to bite.

The closely watched Markit/CIPS UK Construction purchasing managers' index (PMI) rose to 52.8 last month, up from 52.6 in October, and above economists' expectations of 52.2.

A reading above 50 indicates growth.

The sector had continued to bounce back from a slump following the EU referendum, with business activity and incoming new work growing at their strongest pace since March.

However, sterling's post-Brexit vote slump caused cost inflation to hit its highest level for five-and-a-half years.

Housebuilding activity was the best-performing area of the construction industry despite the pace of its expansion easing back to a three-month low.

Commercial activity ended a five-month slowdown to muster a marginal rebound, while civil engineering remained the weakest area of activity.

Tim Moore, s enior economist at IHS Markit, said construction companies were rallying back from the downturn seen in the third quarter of this year.

"The brighter picture reflected another solid contribution from residential building and renewed growth in commercial work, which some companies linked to a resumption of projects that had been delayed after the Brexit vote.

"November's survey data revealed the strongest rise in overall new business volumes since March.

"However, lingering economic uncertainty and subdued investor sentiment meant that optimism towards the year-ahead outlook remained close to its lowest since early 2013."

Construction firms were also boosted by a number of projects which were put on ice after the Brexit vote coming back on stream.

But while the sector continued to take on more staff, business confidence was softer than during the first half of the year as Brexit uncertainty remained at large.

Howard Archer, chief European and UK economist at IHS Global Insights, said November's sharp jump in input prices posed a "major concern".

"A substantial amount of building components and materials are imported and prices are being pushed up markedly by sterling's sharp overall drop."

He added: "While the latest surveys suggest that the construction sector should return to modest growth in the fourth quarter, there are still significant uncertainties for the sector going forward - particularly regarding some clients' willingness to commit to major projects.

"The clear possibility that the economy will slow appreciably over the coming months despite its current resilience and an uncertain outlook for the housing market are also concerns for the construction sector."

Opec and Russia's decision on Wednesday to cut oil production to support prices will ramp up the cost pressures for construction firms, with Brent crude prices already rising around 10% since the start of the week.

The Bank of England predicts inflation will nearly treble over the next two years, shooting up to 2.7% for 2017 and 2018.

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