Rising cost of raw materials threatens to derail recovery in UK construction

Optimism over tentative signs of a recovery in Britain's struggling construction sector was yesterday tempered by warnings that the rising cost of oil as well as other raw materials such as steel could undermine the progress made.

There was a marked increase in activity in February according to the latest construction purchasing managers' index from Markit and the Chartered Institute of Purchasing & Supply (CIPS). The widely watched gauge rose to 56.5, up from 53.7 in January, as the sector reported higher levels of activity for the second successive month. The improvement comes after construction activity declined after being hit by the severe snowfall in December.

Moreover, the pace of growth accelerated to an eight-month high, with an uptick in new business underpinning the rise. Civil engineering activity fared the best, growing at its fastest pace in three years. Encouragingly for the still subdued housing market, residential construction also improved markedly in recent weeks, while commercial activity continued to expand.

Despite this, the February data confirmed another decline in staffing, though the fall was the least of the recent run of job cuts across the construction sector.

Sarah Ledger, an economist with Markit, said the data augured well for the official gauge of activity compiled by the Office for National Statistics. She said: "The latest figures therefore suggest that, having contracted by 2.5 per cent in the final quarter of last year, the ONS measure of construction output should bounce back into positive territory in the first quarter."

The recovery did little to lift the mood in the sector however, with optimism over future prospects remaining weak, not least because of inflationary concerns. The rising price of key raw materials played a part in dampening the enthusiasm as input costs for construction companies rose at their fastest rate in more than two years.

Sentiment was also weighed down by worries over the coming spending cuts and low levels of bank lending.

"Concerns about rising costs and fears over cuts in public spending meant future business optimism remained subdued and well below the long run average," Ms Ledger said.

David Noble, the chief executive of CIPS, also highlighted the issue, saying: "As for manufacturing, the construction sector is suffering from higher input prices which increased considerably during February."