Surprise UK Construction Dip Adds to Recovery Concerns

Output slumped in the UK construction sector during May in another surprise disappointment from the recovering economy.

The Office for National Statistics (ONS) said construction output dropped by 1.1% between April and May after a sharp decline in private commercial work. But year-on-year construction sector output grew by 3.5% in May.

And there was a 1.1% rise over the month in housing output after a sustained period of soaring demand in the property market.

A recovering economy and cheap mortgages thanks to the Bank of England's record-low 0.5% base rate is fuelling housing demand. This is pushing up house prices across the UK, tempting builders to up their residential construction work and chase potential profits.

The monthly dip in construction output follows a similar fall in the production sector. The ONS said its Index of Production fell by 0.7% in May, mostly because of a 1.3% decline in manufacturing output.

"Today's data will add to concerns that the pace of expansion in the UK economy is starting to ease; industrial production figures released earlier this week also underwhelmed many analysts," said Scott Corfe, managing economist at the Centre for Economics and Business Research (CEBR).

"Although construction and manufacturing output are up on a year ago, both showed a month-on-month dip between April and May, raising concerns that the economic situation in the UK is starting to wobble after a glowing period in which almost all data have been largely positive.

"CEBR cautions against being too concerned by the latest construction and industrial output releases – it is just one month of data and we expect both sectors to record expansion in June – but this may be an early sign that the underlying pace of growth in the UK economy will ease in the second half of 2014 and into 2015.

"This is consistent with CEBR's central forecasts – we expect GDP growth to slow from 3% this year to 2.3% in 2015."

Corfe also warned that a skills shortage in the construction sector may hold growth back in the coming months.