Chris said: “The construction PMI provides another indication that the economy is cooling as we move towards the end of the year, which strengthens the case for interest rates to remain on hold. However, the hawks on the Bank of England’s Monetary Policy Committee will not lose sight of the fact that the rate of expansion remains impressively strong, with shortages of skilled labour and raw materials pushing up prices.
“The headline index from the Markit/CIPS Construction PMI fell from 64.2 in September to a five-month low of 61.4 in October. The fall in the index is not a major concern, as it merely indicates a cooling of growth from the super-strong pace seen in prior months. After all, the average reading for the third quarter had been the highest for 17 years. What’s more important is the level of the index, which is clearly well above the 50.0 no-change mark and very elevated by historical standards, signalling still strong growth.
“Although only representing around 6-7% of GDP, the pace of expansion signalled by the PMI therefore suggests the construction sector will again provide a strong contribution to the economy in the fourth quarter, both in terms of boosting GDP and generating jobs*.
“Tomorrow’s services PMI will provide a key ingredient to taking the temperature of the overall economy at the start of the fourth quarter, but with growth having clearly cooled in both manufacturing and construction since earlier in the year, the pace of economic growth looks likely to slow slightly further in the final quarter of the year compared to the 0.7% increase in GDP seen in the third quarter.
“Moderating growth in the construction sector, together with signs that ongoing Eurozone woes are hitting UK manufacturing exports, resulting in a downshifting of growth in the goods producing sector, clearly adds to the case for the Bank of England to restrain from hiking interest rates until the full extent of the slowdown becomes apparent. However, hawks will argue that the pace of growth remains robust, merely slowing from abnormally high rates earlier in the year, and that capacity is being eroded, which is in turn driving up prices. October’s construction survey saw yet another month of widespread supplier delivery delays for items such as bricks and concrete blocks, as well as shortages of suitable sub-contractors. Prices of both raw materials and subcontractors rose sharply again, on average, the latter closing back in on the all-time high seen in August.”
*Note that the solid growth of construction output signalled by the PMI over the summer has been confirmed by data from the Office for National Statistics showing a 0.8% increase in the output of the sector in the third quarter. This rise occurred despite the ONS data showing a 3.9% drop in production in August. The ONS’s first estimate of GDP growth in the third quarter, at 0.7%, includes an estimate of construction output rebounding 4.0% in September.