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UK Construction Sector Expands Most In 6 1/2 Years

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The British construction sector expanded at the fastest pace in nearly six-and-half years in January as strong order growth boosted activity across all sectors, with residential building rising to a ten-year high.

Survey data released by Markit Economics and the Chartered Institute of Purchasing and Supply (CIPS) on Tuesday showed that the seasonally adjusted purchasing managers' index (PMI) for the construction sector climbed to 64.6 in January from 62.1 in December.

Economists had forecast a decline to 61.5. The index has now stayed above the no-change 50 mark for the ninth month in a row, and reached the highest level since August 2007.

Driving the upturn, housing activity grew at the strongest pace in more than ten years. At the same time, both commercial building work and civil engineering activity expanded at the steepest rates since the summer of 2007.

New orders placed with British construction firms increased for the ninth successive month in January, and at a rate that was the biggest since August 2007, helped by the ongoing upturn in domestic economic conditions and easier access to finance.

Responding to the increase in workload, firms raised their employment numbers across the sectors, extending the current sequence of job-creation to eight months. Positive domestic market conditions and the bright outlook for the year ahead also supported hiring.

The survey showed that confidence among constructors, regarding business conditions in the coming year, improved in January to the highest level since September 2009.

"January's survey provides reassurance that the UK construction recovery remains on track, Markit senior economist Tim Moore said.

"The latest data show positive developments on a number of fronts, with job creation rebounding at the start of the year while output and new business growth was the fastest since the summer of 2007."

However, with suppliers still recovering from the recession and pressure mounting on them to meet the rising demand, the continued delay in delivery could become a restraining force on the sector in the coming months.

Howard Archer of IHS Global Insight said that improving housebuilding is particularly welcome news given that a shortage of properties is a major factor repeatedly putting upward pressure on U.K. house prices.

"Nevertheless, the fact remains that there needs to be extended, very strong housebuilding to make significant inroads into the problem," the economist added.

Meanwhile, the Ernst & Young Item Club said in a report yesterday that the recent pick up in house price inflation, with bubble conditions emerging mainly from London, point to the risk of a renewed housing bubble, damping expectations for a sustained housing sector recovery.

The Bank of England is expected to leave its key rate at a historic low 0.50 percent this week. The bank is more likely to reconsider its forward guidance that ensures no rate hike until unemployment falls to 7 percent, amid an earlier-than-expected retreat in the jobless rate towards the threshold.

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