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Construction Industry Surges Back to Life in November as Residential Sector Gathers Momentum

The economy regained lost momentum during the third-quarter, expanding at a rate of 0.4%, up from the 0.3% seen in the second and first quarters.

UK construction activity saw a recovery in November, according to the latest IHS Markit/CIPS PMI, leading output to rise at its fastest pace for five months.

New orders and employment also rose at their fastest pace since June as optimism across much of the sector picked up from what was previously a five-year low.

The November IHS Markit/CIPS Construction PMI rose to 53.1, up from 50.8 in October and substantially ahead of the consensus forecast for a more modest recovery to the 51.2 level.

This marks a sustained departure from the recessionary conditions wrought on the sector during the summer months.

“UK construction companies experienced a solid yet uneven improvement in business conditions during November,” says Tim Moore, a director at IHS Markit. “Survey respondents noted that residential projects underpinned the rebound in total new order growth to its strongest since June, helped by strong demand fundamentals and a supportive policy backdrop.”

On the downside, activity among commercial construction and civil engineering firms declined during November, marking a continuation of the 2017 trend.

The construction PMI, an index that measures activity and sentiment within the construction industry, fell from 54.2 in January to 48.1 suggesting the sector was on the verge of a recession.

Almost all of the decline was the result of a drop-off in new orders for commercial construction and civil engineering firms, which have struggled to replace finished projects with new work given a dearth of new orders in recent months.

Some firms have cited “uncertainty” relating to Brexit as reasons why clients have not gone ahead with new projects. Residential construction activity has continued at a healthy clip, meanwhile, despite the downturn elsewhere.

Sentiment within this segment of industry may be supported by the November budget statement over the coming months. This saw the government announce close to £15 billion of funding to support new housebuilding.

October’s Composite PMI, which is an amalgamation of readings from across the manufacturing, construction and services PMIs, rose strongly - aided by a rapid rise in the services barometer.

“This is significantly above our current forecast of 0.2% q/q, and after a stronger-than-expected Q3 growth rate, we acknowledge that there is now some upside risk to that Q4 forecast,” wrote Sam Hill, senior UK economist at RBC Capital Markets, in a note covering the rise in the composite PMI.

The UK economy regained some lost momentum during the third quarter, when it expanded at a rate of 0.4%, up from the 0.3% seen in the second and first quarters.

Expectations are that it continued to gather pace in the fourth quarter, even after the Bank of England announced its first interest rate hike for a decade, which takes the bank rate up by 25 basis points to 0.50%.

Monday’s data comes against a backdrop of continued uncertainty in the Brexit negotiations, with Prime Minister Theresa May set to meet European Commission chief Jean-Claude Juncker Monday to discuss her latest financial offer to the EU.

Brussels negotiators have insisted the UK agree to pay a financial settlement, for leaving the EU, before they discuss future trade ties with their British counterparts.

Last week, PM May was reported to have made an offer that could result in the UK making payments to Brussels worth close to €100 billion in total and €55 billion after adjustments and deductions are taken into account.

The financial settlement is one of three demands set out by Brussels negotiators. The others involve citizens’ rights and the Northern Irish border.

Without agreements settling all three, fears are that the European Council will not vote to allow negotiations to move forward to the subjects of trade and transition at December’s summit.

If negotiations do not move forward at December’s summit, it may become more difficult to agree a trade and transition deal, as well as have it ratified in all parliaments across the EU, before the UK’s March 2019 departure date.

The Pound was quoted 0.28% lower, at 1.3434, against the Dollar during early trading Monday. The Pound-to-Euro rate was quoted 0.06% higher at 1.1325.

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