UK construction grows at fastest pace for seven months

The construction sector expanded at its fastest pace for seven months in August, despite supply shortages holding back growth, a survey suggests.

The Markit/CIPS construction Purchasing Managers' Index (PMI) surged to 64 in August from 62.4 in July, surprising economists who had forecast a fall.

It is the 16th month in a row that the index has been above the 50 level indicating growth.

The rise came despite the slowest delivery times from vendors since 1997.

Markit said the pace of growth was causing supply problems, with the availability of both materials and sub-contractors dropping at their fastest rate since its survey began in 1997.

As a result, it said there had also been a record rise in the rates charged by sub-contractors.

"The sector is struggling to find enough skilled tradesmen to keep pace with new work and the labour market will continue to put pressure on costs until the next wave of apprentices begin to enter the jobs market," said David Noble, group chief executive at the Chartered Institute of Purchasing & Supply.

Mr Noble said suppliers were still struggling to ramp up production to pre-crisis levels.

The sector, which was hit hard in the financial crisis, began to grow strongly last year, helped by low interest rates and government programmes aimed at boosting demand, as well as the broader economic recovery.

Growth in the sector in August was broad-based, with residential housing, commercial building and civil engineering activity all seeing strong increases.

Residential construction performed the strongest of the three, although the pace of expansion slowed slightly.

Despite the increases, the construction of new homes remains below levels needed to meet demand.

Stefan Friedhoff, global corporates managing director for construction at Lloyds Bank Commercial Banking, said it was "vital" that the current momentum was maintained.

"The true proof of a return to normality will be in activity spreading from a consistently buoyant London out to other regions of the UK," he added.

Howard Archer, chief European and UK economist at IHS Global Insight, said the sector's strong performance increased uncertainty over when the Bank of England would start to raise interest rates.

"We now think it is most likely that the Bank of England will hold fire until the early months of 2015 given low inflation, still very weak earnings and the downside risks to growth coming from heightened geopolitical tensions and stuttering eurozone economic activity, but there is still a genuine possibility that the MPC could act this year."