UK Recovery: Construction Slumps and Production Stagnates as 'Economy Slows'

A sudden slump in construction sector output and flat growth in manufacturing and production between October and November has cast a cloud over the positive mood surrounding the UK's emerging economic recovery.

The Office for National Statistics (ONS) said construction output dropped 4% across the month in November, driven by falling new work in the private commercial sub-sector.

There was zero growth over the month in production and manufacturing. The ONS also revised down its October data for all three sectors, which combined account for more than a fifth of UK GDP.

"Despite the wave of optimism on the UK economy, the evidence suggests that the economy slowed in the fourth quarter of 2013," said Azad Zangana, European economist at Schroders.

"At this stage, we believe the slowdown is in reaction to the weak demand in the previous quarter and the subsequent build-up of inventories. The slowdown in activity will help reduce those excess inventories; however, we only expect to see a slight acceleration in growth in the first quarter of this year."

He added: "While the slowdown is by no means a disaster, it will challenge the prevailing market views that the Bank of England will raise interest rates at some stage towards the end of this year."

Zangana said Schroders estimates 0.5% GDP growth in the fourth quarter, a slowdown from 0.8% in the third. He also said he expects the Bank of England to hike interest rates in 2016 and revise its forward guidance on a 7% unemployment rate threshold lower.

The Royal Bank of Scotland (RBS) said the recent data points to 0.6% growth in the closing three months of 2013.

"A 0.6% outturn would hardly be a major cause for concern – this would be a trend-like pace of expansion – but it would symbolise a less apparent UK outperformance in terms of the high-frequency data," said Ross Walker, UK economist at RBS.

"With the preliminary Q4 GDP estimate scheduled for publication shortly before the February Bank of England MPC meeting and Inflation Report, any such moderation in growth might be welcomed by central bank policymakers wishing to lower their unemployment rate threshold to signal no early Bank rate rises."

Mike Rigby, head of manufacturing at Barclays, said that despite the disappointing production data there is "no doubt that confidence in the sector is improving, thanks to the revival of the domestic market".

"The final quarter of the year is historically a positive one for manufacturers, and all eyes will now be on December's figures, which should reveal a triumphant end to a strong year for the sector," he added.

Private sector survey data has surged upwards in the third quarter, against drab figures from the ONS.

The purchasing managers index (PMI) compiled by research firm Markit said the UK construction sector was hitting record highs in November. The manufacturing PMI rose higher in November and December, capping off nine months of consecutive output growth, according to the surveys.