Markit Comment – UK construction and trade

“Official data provide tentative signs that the construction industry and exporters are seeing some signs of improved performance after the post-referendum soft patch. However, both construction data and trade numbers are highly volatile and subject to substantial revision, with lingering doubts over data accuracy, so need to be treated with due caution.

“The UK’s construction sector suffered a smaller than previously thought decline in the third quarter, according to data from the Office for National Statistics, but still saw output drop 0.8% compared to the second quarter. The trend rate of decline showed signs of easing at the start of the fourth quarter, however, with output down 0.6% in the three months to October. The improvement is being led by house building. Survey data for November point to a further improvement in the trend, again led by the housing sector, suggesting that construction activity continued to rebound from the post-referendum weak patch seen during the third quarter. Business activity and incoming new work increased in November at the strongest pace since March.

“The rate of growth signalled by the surveys nevertheless clearly remains subdued relative to the strong expansions seen in 2014 and 2015, highlighting how uncertainty has dented demand for construction projects this year, especially commercial building.

“It’s also unlikely that construction growth will pick up significantly next year: the PMI survey also found that business confidence in the sector about the year ahead was still softer than seen during the first half of the year, with construction companies generally noting that Brexit-related uncertainty had the potential to weigh on business activity during 2017.

“The trade deficit, including both goods and services, meanwhile narrowed more than expected in October, down to £1.971bn from £5.812bn in September. The deficit in goods shrank from £13.832bn to £9.711bn. However, the big disappointment was news that goods export volumes fell by 2.1% in the three months to October, while imports rose by 4.4%. Given the steep fall in sterling, one would have expected this to be the other way round, with exports rising and imports falling.

“Errors in the trade data supplied to the ONS mean that prior numbers have had to be restated significantly, once again raising question marks over how much emphasis we should place on the official trade figures. Our scepticism is raised further by the fact that the ONS trade data also sit in stark contrast to the business surveys, which seem to paint a more reasonable-looking picture of exports, given recent events. The manufacturing PMI survey has shown that goods exports have risen since the pound’s dramatic fall that followed the EU referendum, with companies seeing the exchange rate as a key driver of improved export performance, alongside rising demand in key markets such as the US and continental Europe, both of which are showing signs of stronger economic growth.

“The one ray of light in the official data was a £2bn rise in exports in October alone, suggesting the official data may be starting to also show signs of the weaker pound have some beneficial effect. However, the surveys also indicate that companies are already having to pass higher costs for imported components on to customers in the form of increased selling prices, therefore eroding some of the benefits of the weaker pound in terms of export competitiveness. The November survey showed that export orders growth has consequently already slowed sharply from a peak in September.”