Weak construction data flags Q2 growth risks

LONDON Wed May 4, 2011 1:18pm BST

A crane is seen on a construction site in central London August 9, 2009. REUTERS/Luke MacGregor

A crane is seen on a construction site in central London August 9, 2009.

Credit: Reuters/Luke MacGregor

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LONDON (Reuters) - Growth in the construction industry slowed more than expected last month, an industry survey showed Wednesday, casting further doubt on the strength of the country's patchy economic recovery.

The sharp fall in the Markit/CIPS construction PMI survey followed weaker-than-expected figures for mortgage and consumer lending from the Bank of England, as well as a marked decline in house prices.

Sterling hit a 13-month low against the euro in the wake of the data, and financial markets had already pushed back expectations of a first Bank interest rate rise to the end of the year, after a slew of poor figures since last week's tepid first quarter GDP reading.

"It's hard to find any evidence in today's data to suggest that the overall economic recovery is back on track," said Capital Economics's Samuel Tombs.

Markit said the construction PMI fell to 53.3 in April from 56.4 in March, below the 55.5 forecast, after the first fall in house building this year. Tuesday, the manufacturing PMI also showed a bigger than expected slowdown in activity.

Both measures are still above the 50 mark that separates growth from contraction, and Wednesday's figures gave some economists hope that official Q1 GDP data showing the biggest fall in construction output since early 2009 may prove wrong.

The economy grew by just 0.5 percent in the first three months of the year -- a poor performance given economists had expected some catch-up after heavy snow contributed to a 0.5 percent fall in output in the last three months of 2010.

This makes it a near certainty that the Bank will not raise interest rates from a current record low of 0.5 percent on Thursday, when it concludes its May Monetary Policy Committee meeting, despite inflation running at twice its official target.

HOUSING WEAKNESS

Nonetheless, the Bank, mortgage lender Nationwide and the country's official Land Registry all reported evidence of renewed housing market weakness Wednesday.

The Land Registry said house prices suffered their biggest monthly drop in more than two years in March, and net mortgage lending figures from the Bank came in lower than any of the forecasts in a Reuters poll of nine economists.

House prices fell less after the credit crunch than in countries like the United States and Spain, due to less new construction beforehand, but have edged lower since the middle of last year when a partial recovery petered out.

Mortgage lender Nationwide -- which said prices were down 1.3 percent in the year to April -- predicted that house prices would end 2011 flat to slightly lower.

Mortgage approvals were a relative bright spot, with 47,557 home purchases given the go-ahead in March, the highest number since November. But even this was slightly less than the 48,000 economists had predicted.

"The big picture is of a pretty lifeless housing market, with low turnover and very little new money coming into it," said Ross Walker, an economist at Royal Bank of Scotland.

The Bank also reported growth in unsecured consumer lending slowing to 0.1 billion pounds in March from February's 0.8 billion, below expectations and pointing to broader weakness in consumer demand.

High inflation, rising taxes and slow wage growth have caused Britons' real household disposable income to suffer its first fall in a generation, depressing the consumer spending that was the mainstay of British growth before the recession.

(Additional reporting by Peter Griffiths and Fiona Shaikh, editing by Ruth Pitchford, Ron Askew)

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