New construction figures offer hope for GDP

The double-dip recession may not be as deep as originally feared after figures today showed a less severe decline in construction sector output than previously estimated.

Construction output between April and June fell by 3.9% quarter-on-quarter, the Office for National Statistics (ONS) said, compared to a previous estimate of a 5.2% decline.

While the decline still shows a struggling construction sector, with new infrastructure projects weighing most heavily on the industry, analysts said the figures could lead to an upward revision in total economic growth for the period.

Gross domestic product (GDP) shrank by 0.7% in the second quarter, the first estimate from the ONS said, but this could be revised up to a decline of 0.5%.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "The good news is that construction output fell less in the second quarter than had been estimated, which boosts the prospects of a significant upward revision to the second quarter GDP data."

Meanwhile, official figures showed a slowdown in the rate of so-called factory-gate inflation, the prices charged by manufacturers, to 1.7% in July from 2% in June.

Within the figures, the ONS said the volume of all new work fell by 4.6% and repair and maintenance fell by 2.7% quarter on quarter.

The largest falls in new work were seen in public housing, infrastructure and other public non-housing, while the decline in maintenance work was steepest in private housing.

The movement of the late May bank holiday to June 2012, the additional bank holiday for the Queen's Diamond Jubilee and the unseasonal weather were likely contributing factors to the decline in the second quarter, the ONS added.

The hope has been that the construction sector will eventually benefit from various government measures aimed at boosting infrastructure and housebuilding.

The latest initiative has seen the government launch a scheme to underwrite risk on large infrastructure projects to allow work to go ahead on schemes that are stalled due to market conditions.

Graham Robinson, construction industry expert at international law firm Pinsent Masons, said investing in construction is the best stimulus for economic growth but Government investment has so far "failed to materialise".

He said: "The International Monetary Fund has also warned that the time is coming for the Treasury to act in order to stimulate growth.

"These figures show that the best way for the Government to do that is to invest in infrastructure and halt the rapid decline in a sector which is so crucial to the success of the wider economy."

The producer prices index did show a rise in input prices - paid by manufacturers for the raw materials used in their products - but analysts said it was unlikely to signal an emerging consumer price inflation threat.

PA