Phantom construction slump to cut UK GDP
Simon Ward
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UK GDP figures are likely to receive another hit from a plunge in construction activity, at least as recorded by the Office for National Statistics.
Construction orders slumped by 16% in the second quarter, breaking below the recession trough of the first quarter of 2009 to reach the lowest level since 1980. This suggests that construction output, which lags orders, will fall at least to the low reached in the second quarter of 2009, implying a decline of 7% from the second quarter of 2011 – see chart.
Construction output accounts for 6% of the economy so a fall of 7% would cut GDP by 0.4%, probably spread over the third and fourth quarters of 2011.
The suggestion that construction activity is even weaker than at the trough of the recession is not supported by PMI and EU Commission construction surveys. The PMI, indeed, is consistent with gradual expansion, with the headline index above the breakeven 50 level every month so far this year (52.6 in August).
The slump in official orders should contribute to the MPC reducing its near-term GDP projection, further increasing the probability of an expansion of QE at next week's meeting.
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