UK construction output expands for fifth straight month in September as homebuilding posts strongest growth in a decade; Markit Economics' building activity index slips to 58.9 from August's record-high 59.1

, October 2, 2013 () – 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 this quarter as the housing market enjoys its strongest run since the financial crisis. Chancellor of the Exchequer George Osborne declared on Sept. 29 that Britain had “turned 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 a 0.9 percent growth. But a lot rests on the services sector,” the largest part of the U.K. economy.

The pound rose after the report and was trading at $1.6217 as of 10:30 a.m. London time, up 0.1 percent on the day. The benchmark 10-year government bond 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.

Economic growth may have accelerated to 1 percent in the third quarter, its fastest pace for more than three years, Howard Archer, an economist at IHS Global Insight in London, said after today’s report.

Help to Buy

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.

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

House prices rose the most in more than six years in September, as government measures helped to boost demand, 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 next week, three months earlier than planned.

Recovery Challenges

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 meeting in Paris today will keep the benchmark main refinancing rate unchanged at a record low of 0.5 percent, according to all 52 economists in a Bloomberg News survey. The central bank will announce its interest-rate decision at 1:45 p.m. and Draghi will hold a press conference 45 minutes later. The meeting is being held a day earlier than normal because of a public holiday in Germany tomorrow.

--Editors: Andrew Atkinson, Francis Harris

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