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U.K. Construction Expands in Sign of New Growth: Economy

Oct. 2 (Bloomberg) -- U.K. construction output expanded for a fifth month in September as homebuilding posted its strongest growth for a decade, adding to evidence the economy gained pace in the third quarter.

An index of building activity slipped to 58.9 from a record-high 59.1 in August, Markit Economics said today in London. The gauge has been above 50, the level separating expansion from contraction, since May. The median estimate of economists in a Bloomberg News survey was for a gain to 59.5.

The U.K. economy grew 0.7 percent in the second quarter and indicators suggest a further strengthening since then as the housing market enjoys its strongest run since the financial crisis. Prime Minister David Cameron told his Conservative Party’s annual conference today that Britain is “beginning to turn a corner” and Bank of England Governor Mark Carney said last week he doesn’t see an argument for expanding stimulus.

“There’s a slight moderation in the headline but they’re still pointing towards a very good third-quarter number,” said Stuart Green, an economist at Santander in London. “My forecast is for 0.9 percent growth. But a lot rests on the services sector,” the largest part of the U.K. economy.

The pound approached the strongest level since January versus the dollar following the construction report and was trading at $1.6241 as of 3:10 p.m. London time, up 0.3 percent on the day. The benchmark 10-year gilt yield was little changed at 2.71 percent.

Residential construction was the strongest performing building sector last month, expanding at its fastest pace since November 2003, Markit said. Commercial building work grew the most since May 2012.

‘Riding High’

Building firms added jobs at the quickest rate for almost six years as order book swelled, the report showed. Companies were more optimistic about their prospects than at any time since April 2010. Costs rose the most since 2011 in a sign of buildings inflation pressures.

“Construction is no longer the weakest link in the U.K. economy,” said Tim Moore, senior economist at Markit. “The third quarter of 2013 ended with output growth riding high amid greater spending on infrastructure projects and resurgent house building activity.”

An index of manufacturing slipped to 56.7 in September from a 2 1/2-year high of 57.1 in August as export demand slowed, Markit said yesterday. A services gauge probably held at a seven-year high of 60.5 last month, economists said before a separate report tomorrow.

Growth Momentum

“Forward looking indicators signal that that pace of growth will be maintained for the next two quarters,” BOE policy maker Paul Fisher said today in London. Doing more quantitative easing now would risk adding “fuel to what’s already a growing economy,” he said.

Wolseley Plc, the world’s biggest distributor of plumbing and heating products, yesterday reported a 9 percent increase in full-year profit. Chief Executive Officer Ian Meakins said that U.K. market growth is “encouraging” and noted an improvement in housing transactions.

Construction has fared worse than the services and manufacturing sectors of the economy since the financial crisis, the victim of government austerity and a credit famine. From its peak in early 2008, output contracted by a fifth over the following five years.

The pickup in homebuilding activity may ease concerns that a bubble is developing in the housing market after Cameron began offering government subsidies for cash-strapped home buyers in April under his Help to Buy program.

Homes Needed

House prices rose the most in more than six years in September, according to property researcher Hometrack. Nationwide Building Society also reported an increase in prices in September and said homebuilding is “well below” the pace needed to keep up with demand.

Cameron defied critics of Help to Buy including the International Monetary Fund this week and said the second phase of the program will start now, three months earlier than planned.

Separate data from the Bank of England highlighted the challenges facing the recovery as consumers seek to reduce debts rather than borrow. Britons injected a net 15.4 billion pounds of equity into their homes in the second quarter, the BOE said. Prior to the financial crash, consumers borrowed against the value of their homes to fund purchases of everything from cars to vacations.

European Central Bank policy makers kept the benchmark main refinancing rate unchanged at a record low of 0.5 percent at their meeting in Paris today.

“I see a recovery that’s weak, that is uneven, that’s fragile and it really starts from very low levels,” ECB President Mario Draghi said in a press conference. “Unemployment is now stabilizing at high levels, very high levels.”

To contact the reporter on this story: Eshe Nelson in London at enelson32@bloomberg.net

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

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