Construction data may be understating UK recovery

Published 13th May 2011

Friday's upward revision to first-quarter construction data narrows the gap with industry surveys but won't eliminate suspicions that the official data is still understating the strength of Britain's recovery.

The Office for National Statistics said on Friday that UK construction activity shrank 4 percent in the first three months of the year, less than an initially estimated 4.7 percent fall but still acting as a powerful drag on the economy which has stagnated at best since September.

Industry surveys, however, show construction bounced back after a snow-hit December and has grown steadily since the start of this year.

Put simply, evidence on the ground seems totally out of whack with figures churned out by official statisticians, who -- purely coincidentally or not -- changed the way they collect the data last year.

Britain's biggest house builder by volume Barratt Developments and smaller rival Bovis Homes both issued upbeat trading statements this week, while building materials company Marshalls posted a 10 percent rise in four-month revenue.

Surveys also paint an improving picture, including Markit's construction purchasing managers index, which has held comfortably in expansionary territory, while the FTSE 350 Household Goods index, dominated by big-name house builders, has rallied more than 15 percent in the past two months.

TIMING DISTORTIONS?

The statistics office has mounted a vigorous defence of its figures, and believes there is no reason why recent methodological changes should have created any distortions.

Last year it switched from a quarterly series to a monthly one. It also cut the number of firms it questioned, to 8,000 from 12,000, and included a bigger proportion of smaller firms.

Stephen Radcliffe, director of UK Contractors Group, reckons both the upward swing in construction in mid-2010 and the downward lurch over the past two quarters have been exaggerated and believes timing issues may be to blame.

Firms asked to gauge their output in a particular month are likely to look at invoices or receipts, many of which may refer to work done the previous month or even earlier.

Given that icy weather brought construction work to a virtual standstill in December, this might help explain why figures for January and February were so weak.

Problems with seasonal adjustments and distortions due to tax changes are also potential culprits.

Adjusting a series with no long-run history is tricky and January's rise in VAT tax -- to 20 percent from 17.5 percent on most repair and maintenance work -- could have led to some underreporting of work done in the first quarter.

CRITICS UNBRIDLED

Friday's revision has done little to ease analysts' mistrust.

"The plunge in activity is still huge and completely at odds with most other evidence relating to the sector," said Chris Williamson, Markit's chief economist. "If these data were not included in the government's calculations of GDP we would ignore them."

Discrepancies between official indicators and survey evidence often disappear over time. But the difference has amplified uncertainty about whether the UK economy's recent weakness was a weather-related blip or the start of a more sustained slowdown.

Excluding construction, the economy would have grown 0.8 percent in the first quarter, broadly as both the Office for Budget Responsibility and the Bank of England expected.

The Bank highlighted the unusual volatility of official construction data in its quarterly update on Wednesday and assessed the economy's underlying momentum at great length.

Construction only accounts for around 6 percent of the UK economy but its volatility magnifies the impact on GDP swings.

JP Morgan economist Malcolm Barr reckons the suspiciously weak reading of construction in the first quarter could be the prelude to a bounce back of a similar magnitude in the second.

"Swings in construction still have the potential to bump the GDP data around," he said.

Source: ' Reuters '

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