UK construction growth hits seven-month high, but outlook darkens: PMI

By Andy Bruce

LONDON (Reuters) - Growth in Britain's construction industry hit a seven-month high in October as housebuilding rose, but slowing order books and soaring prices for building materials darkened the outlook, a survey showed on Wednesday.

The Markit/CIPS UK Construction Purchasing Managers' Index(PMI) rose unexpectedly to 52.6 from 52.3, confounding a Reuters poll forecast for a drop to 51.8. Sterling and government bonds showed little reaction to the figures.

While the survey chimed with signs the economy has maintained momentum since June's Brexit vote, weakening growth in new orders and rocketing costs suggested next year will prove more difficult.

"The downturn in the construction sector continued to ease in October, but it would be premature to conclude that the sector is back on a recovery path," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

Survey compiler IHS Markit said respondents held back investment spending because of uncertainty surrounding Britain's exit from the European Union.

Britain's second-biggest housebuilder Persimmon cited this uncertainty on Wednesday as it said it would slow the pace of new land purchases, despite sales rising almost a fifth since the Brexit vote.

The PMI showed business expectations for the year ahead cooled markedly, while prices paid by construction firms for raw materials and goods rose at the second-fastest pace since 2011.

"We expect input prices to rise significantly in 2017 which will put financial pressure on an industry just about managing on squeezed margins and fixed-price contracts," said Paul Trigg, construction specialist at trade credit provider Euler Hermes.

A Markit/CIPS survey of manufacturers on Monday also showed rocketing input prices, describing the inflationary impact of weaker sterling as increasingly evident.

The fall in sterling is expected to push the Bank of England to raise its inflation forecasts on Thursday to show a bigger overshoot of its price target than at any time since it gained independence in 1997.

The BoE is widely expected to hold off from a fresh interest rate cut on Thursday.

Housebuilding drove the bulk of construction activity, with the commercial and civil engineering sectors broadly stagnant, the PMI showed.

Mortgage lender Nationwide reported unchanged house prices in October after rising in monthly terms in each of the previous 15 months, a new sign of the market cooling after the Brexit vote.

Preliminary official data for the third quarter suggested construction output contracted 1.4 percent, despite stronger-than-expected economic growth of 0.5 percent for the period.

(Reporting by Andy Bruce, editing by Catherine Evans and Richard Balmforth)

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