U.K. Recovery Signs Mount From Builders to Retailers: Economy

U.K. Construction Unexpectedly Resumes Expansion on Homebuilding
Output was led by a “robust expansion” of residential activity, while commercial construction and civil engineering activity declined, according to the report. Photographer: Simon Dawson/Bloomberg

June 4 (Bloomberg) -- U.K. construction unexpectedly returned to growth last month and retail sales increased, adding to indications of a tentative economic recovery.

An index of building activity rose to 50.8 from 49.4 in April, Markit and the Chartered Institute of Purchasing and Supply said today in London. This is the first reading above 50, which divides expansion from contraction, since October. A separate report from the British Retail Consortium showed like-for-like retail sales increased an annual 1.8 percent in May.

Recent economic data have suggested some signs of strength in the economy, with Markit’s factory index climbing to a 14-month high in May. Still, the recovery has not yet fully taken hold and Bank of England Governor Mervyn King, who will lead his last policy meeting this week before retiring, has said that growth is not as strong as he would like.

“The May data reinforced further the trend seen in recent months of a stabilization in construction activity,” said Blerina Uruci, an economist at Barclays Plc in London. Still, “much of the recent increase in activity seems to rely on just residential construction, which leaves the index prone to further volatility should the recent housing contraction improvement fizzle out.”

Economists had forecast that the construction index would increase to 49.8, according to the median of 14 estimates in a Bloomberg News survey. Homebuilder Barratt Developments Plc said last month that the market backdrop “is the most positive we have seen for five years.”

Homebuilding Reliance

Markit said construction output was led by a “robust expansion” of homebuilding, while commercial and civil engineering activity declined. The industry is “worryingly reliant on residential building for thrust,” said Markit economist Tim Moore.

The BRC and KPMG report showed that total retail sales rose 3.4 percent in May from a year earlier, with growth helped by furniture demand and discounting by stores. In the quarter through May, same-store retail sales rose 0.7 percent from a year earlier. Food sales also gained 0.7 percent.

“While sales didn’t soar through the roof, this is still a very creditable performance,” said David McCorquodale, head of retail at KPMG. “Promoting the right product at the right price made the difference in May.”

As with Markit, the BRC also sounded a note of caution on the outlook, saying that while customers are “responding well” to discounting, “volatile economic conditions mean that this will remain a delicate balancing act for some time.”

BOE Meeting

The BOE’s Monetary Policy Committee begins its two-day meeting tomorrow in London. It will keep quantitative easing at 375 billion pounds ($575 billion) on June 6, according to the median of 43 forecasts in a Bloomberg News poll. The MPC will also keep its key interest rate at 0.5 percent, another survey showed.

Markit’s manufacturing index climbed to 51.3 in May from 50.2 in April, which was revised from 49.8. A gauge of service companies probably rose to 53.1 from 52.9, economists said before another report tomorrow.

King said in an interview broadcast on June 2 that there are “signs now of a recovery.”

“The economy is growing,” he said. “Not as fast as we would like it to grow, but no one can foretell the future.”

Markit said today the increase in construction output in May was supported by the first improvement in new business volumes for 12 months. However, the rate of order growth was “marginal” and employment was broadly unchanged, it said.

Euro-Area Inflation

In the euro area today, data showed producer prices unexpectedly declined in April from a year earlier, the first drop since February 2010, giving the European Central Bank scope to add to stimulus if needed.

Factory-gate prices in the 17-nation economy fell 0.2 percent after a 0.6 percent annual increase in March, the European Union’s statistics office in Luxembourg said. Economists had projected a 0.2 percent gain. The ECB will keep its benchmark rate at a record low of 0.5 percent when it meets on June 6, according to a survey of economists.

Spain’s registered unemployment dropped in May as its peak tourism season started. The number of people registering for jobless benefits fell by 98,265 from April to 4.89 million.

In Australia, the central bank said it still has room to cut the benchmark rate from its record-low level.

Governor Glenn Stevens and his board kept the Reserve Bank of Australia’s overnight cash-rate target at 2.75 percent today. “The inflation outlook, as currently assessed, may provide some scope for further easing, should that be required,” Stevens said.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net