LONDON (Reuters) - The construction sector grew faster than expected in May and added jobs for the first time in nearly a year, offering a chink of light in what has become a generally sombre outlook for the economy.
Thursday's Markit/CIPS headline construction PMI index rose to 54.0 in May from 53.3 in April, beating forecasts for a reading of 53.6 and giving sterling a boost.
Economists said the figures suggested the sector grew in the second quarter and that it fared better between January and March than the 4 percent decline reported by official data.
Firms were also their most optimistic in a year about future activity.
However, government spending cuts and fragile house prices remain likely to drag on home building and large projects such as new schools, hospitals and infrastructure.
"The survey shows decent but unspectacular activity," said IHS Global Insight economist Howard Archer. "Nevertheless, the construction sector clearly faces a challenging environment, which is likely to limit activity over the coming months."
Sterling rose 20 pips versus the dollar after the data to around $1.6340, while the euro briefly dipped to around 88.00 pence, coming off an earlier two-week high of 88.23 pence.
The government is cutting public spending by more than 80 billion pounds over the next four years to try to eliminate a budget deficit running at close to 10 percent of GDP.
Markit said government cuts contributed to the first fall in civil engineering activity for five months.
Commercial building was the strongest of the three sub-sectors for a second month running, while house building grew in May after a contraction in April.
"The millstone of public spending cuts can be seen clearly (in the data)," said David Noble, chief executive at the Chartered Institute of Purchasing & Supply.
"It remains to be seen whether a marked expansion of commercial projects will help to replace what has been lost elsewhere."
Construction companies saw a marked rise in new business as lengthy contract negotiations translated into new work, Markit said. That led to the first rise in employment in the sector since June 2010.
Purchasing of materials increased for a fifth consecutive month in May at a rate broadly in line with that seen in April, pointing to a further rise in activity.
Kingfisher Plc, Europe's biggest home improvements retailer, said on Thursday it expected 2011 to be a tough year, particularly in Britain.
A manufacturing PMI survey on Wednesday showed activity grew at its slowest pace in 20 months in May, highlighting the fragile state of the recovery.
A survey of the dominant services sector is due to be released on Friday at 9:28 a.m.
(Editing by John Stonestreet)