July 3, 2012 / 8:48 AM / 7 years ago

Construction shrinks at fastest pace in 2-1/2 years

LONDON (Reuters) - British construction activity fell at its fastest pace in two-and-a-half years in June as underlying business conditions worsened and an extra public holiday hit output, a survey showed on Tuesday.

The gloomy data will make grim reading for the government and Bank of England who are facing increasing calls to act and boost growth in an economy that fell back into recession at the start of the year.

The Markit/CIPS Construction Purchasing Managers’ Index sank to 48.2 from 54.4 in May, it’s lowest reading since December 2009 and falling below the 50 level which separates growth from contraction and missing forecasts for a more modest fall to 53.0.

“The UK construction sector moved back into reverse gear in June with output falling at its fastest pace since the end of 2009,” said Tim Moore, senior economist at data compiler Markit.

The data comes the day after figures showed the manufacturing sector contracted for the second month running in June and ahead of a Wednesday release that is expected to show only tepid growth in the dominant service sector.

With economists seeing marginal growth ahead at best, and only a mild improvement next quarter from London’s hosting of the Olympic Games, the BoE is widely seen restarting its quantitative easing asset purchase programme.

The Bank is expected to top up the 325 billion pounds of cash it has already pumped into markets with another 50 billion when it meets on Thursday as falling inflation gives it more scope to support the battered economy.

Cost pressures eased markedly, Markit said, giving the central bank more room to manoeuvre as increased costs for energy and raw materials were offset by lower fuel prices.

Markit said respondents cited uncertainties about the economic outlook, as well as disruptions from the extra holiday to celebrate the Queen’s Diamond Jubilee and severe weather across large parts of the country, as reasons for the decline in activity.

“However, these temporary factors should not be overplayed, as the latest figures reveal worsening underlying business conditions within the sector,” Moore said.

With new orders declining at their fastest pace April 2009 firms cut their workforce for the first time since February and while they expected business to pick up in the next 12 months the degree of positive sentiment was well below the long-run survey average.

Reporting by Jonathan Cable; Jonathan.Cable@thomsonreuters.com+44 20 7542 4688

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