Recession fears raised as UK construction sector contracts

Fears that Britain’s double-dip recession deepened in the second quarter of 2012 heightened on Tuesday after the latest snapshot of the construction sector revealed a marked deterioration in business conditions.

The monthly survey from CIPS/Markit showed that the closely watched Purchasing Managers’ Index dropped from 54.4 to 48.2 in June – below the 50 level that separates a sector that is expanding from one that is contracting.

Weakness in construction was a big factor behind the economy’s 0.3% decline in the first three months of 2012 and analysts warned that the latest data pointed to another quarter of falling output.

David Tinsley, UK economist at BNP Paribas, said the evidence from the PMI was that construction was contracting at its fastest rate in two-and-a-half years, but that the extra bank holiday to mark the Queen’s diamond jubilee probably played a part.

“The weather may also be playing a part – it’s close to being the wettest June in England since 1910. Still reports also suggest weaker underlying business conditions, with civil engineering and housing the worst performing areas.”

Howard Archer, UK economist at IHS Global Insight said the survey was weak even once the two-day bank holiday at the start of June was taken into account.

“Until recently, construction survey evidence had been appreciably stronger than the hard data which had fuelled hopes that the sector was doing appreciably better than officially reported by the Office for National Statistics. Unfortunately though, it is the survey evidence that is deteriorating rather than the hard data improving.”

With the PMI for manufacturing also running below the 50 level, the City is now looking to the Bank of England for fresh stimulus measures at the two-day meeting of Threadneedle Street’s monetary policy committee which starts on Wednesday. Analysts believe the Bank’s £325bn quantitative easing programme will be expanded by at least £50bn.

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