The UK construction PMI edged up a little in May, and increases in the new orders, employment and business expectations series as well meant that the detail of the survey was also largely positive. Whether this relative strength can be maintained as public sector retrenchment becomes more noticeable is of course questionable. However, for now it appears that the construction sector is holding up reasonably well, particularly when compared to the rather worrying manufacturing PMI release yesterday.
Despite its relatively small share of the economy (just over 6%) the UK construction sector has proved a major driver of GDP recently, supporting growth in the middle of last year but then making significant negative contributions around the turn of 2011. And with the reliability of official construction data being increasingly questioned, the construction PMI could well begin to receive greater attention when assessing the underlying strength of the sector.
In this respect the latest figures suggest that growth is holding up reasonably well. The headline index rose from 53.3 to 54.0 in May (consensus 53.5), which is broadly in-line with both its long-run average and the average reading since March 2010 (when the index rose back above 50 for the first time following the recession). Moreover, new orders increased by almost 1.5 points to 56.3, while the employment index edged above the 50 breakeven mark for the first time since June 2010 (51.3 from 49.1). Finally, business expectations continued to improve (66.8 from 63.5) and are now the most positive since the June 2010 budget.
Whether such trends in the construction sector can be maintained, however, is of course questionable given the large degree of public sector support in recent years and that public sector investment expenditure is scheduled to fall by 28% on a cumulative, real terms basis by 2014/15. However, for now it appears that construction growth is holding up reasonably well, and the improvement in business expectations back towards their pre-June 2010 level may suggest that fears surrounding the effects of public sector retrenchment among construction companies have lessened.
Bottom line
The UK construction PMI edged up in May, and positive trends in new orders, employment and business expectations all suggest that growth in the sector is holding up reasonably well at present.
Andrew Grantham
HSBC Global Research