Slowdown in building sector fuels calls for Bank action

Weaker construction survey in May makes the case for another round of stimulus at today's meeting

Pressure has increased on the Bank of England to announce more stimulus today to boost the UK economy, after a key survey pointed to a weakening construction sector. The Markit/Cips survey of purchasing managers for May showed the slowest growth in the building industry for three months and a pronounced downturn in confidence.

The PMI index fell from 55.8 in April to 54.4 last month, with any figure over 50 signalling expansion, while the index of positive sentiment fell to its lowest level since last October.

About a third of respondents thought their output would increase over the next 12 months, while a fifth expected a contraction. The resulting balance signalled that the degree of positive sentiment about future business was at its lowest level in six months.

Howard Archer, the chief UK economist at IHS Global Insight, said: "This is undoubtedly a disappointing survey that raises concerns about the current health of the construction sector and its near-term prospects at least."

At its May meeting the Bank of England's nine-member Monetary Policy Committee voted eight to one against extending its £325bn quantitative easing programme, despite the UK slipping into its first double-dip recession since the 1970s. The MPC is due to announce the decision of its June meeting at midday today.

A host of economic data in recent weeks has pointed to a further weakening of the economy. Last week's Markit/Cips survey of the manufacturing sector pointed to the biggest collapse in activity since the bankruptcy of Lehman Brothers in 2008 and the second-largest drop in the survey's 20-year history.

There has been a divergence this year between the picture painted by industry surveys of the construction sector and the official data. The Markit/Cips survey showed output hitting a two-year high in March. Yet figures from the Office for National Statistics showed that construction was one of the sectors that dragged the UK into a new recession this year, after shrinking by 4.8 per cent over the first quarter of 2012.

The MPC said earlier this year that it was inclined to attach more weight to the survey data, but with that now weakening too, City analysts are increasingly expecting more stimulus, if not tomorrow, then in the coming months.

ONS figures show that sharp cuts in state infrastructure spending are responsible for the contraction in the construction industry. In May the CBI called on the Government to underwrite new infrastructure projects to encourage the private sector to invest.

Tim Moore, a senior economist at Markit, said the latest construction survey suggested weakening expectations. "This reassessment of the year-ahead outlook represents worries within the construction sector that weakening economic conditions could leave firms running on empty again, once existing projects have come to completion," he said.

At its last meeting eight members of the MPC, including the Governor, Sir Mervyn King, voted to keep the QE asset purchase scheme on hold. David Miles, an external member, voted to extend it by £25bn.

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