UK construction activity bounces back in January

Construction activity returned to growth in January, helped by better weather and a rise in new business, the monthly Markit/CIPS purchasing managers index showed on Wednesday.

The figures indicate the sector made a strong start to 2011, and come a day after an equivalent survey of manufacturers showed activity growth hit a record high, suggesting the economy is rebounding from a shock 0.5 percent fall at the end of 2010.

The pound hit a three-month high against the dollar after the construction data, which raised the likelihood that the Bank of England will start tightening monetary policy sooner than previously expected.

Markit said construction companies' expectations for the coming year rose to an eight-month high. However, employment continued to fall and Markit said the outlook for further growth in the sector was muted.

The Markit/CIPS PMI construction activity index rose to 53.7 in January from December's reading of 49.1, which had been the first fall in 10 months, due to heavy snowfall.

Some of this was just a sort of base effect distortion in all probability -- but it does suggest that the snow was a blip and we have got back to levels of activity above the pre-weather disrupted period, said Ross Walker, economist at RBS.

While the pound rose, gilt and short sterling futures fell as investors bet on the prospect that a return to growth increased the likelihood of a rate hike from the Bank of England.

In a sign the central bank is inching closer to tightening policy, Deputy Governor Charles Bean said it may be forced to raise rates if commodity prices continue to climb and inflation becomes embedded, while long-standing board member Andrew Sentance said the bank risked losing its inflation-fighting credibility if it did not act soon.

Markit said that for the first time since August, all three construction sub-sectors reported an increase in activity -- including housebuilding, ending four months of contraction.

Companies reported that January's improvement in part reflected a rebound from harsh weather in December, which had contributed to the first fall in activity since February of last year, Markit said.

Looking at the trend in the data over the past two months as a whole, the picture is one of very modest growth, well below the strong pace seen in the first half of last year.

(Reporting by Fiona Shaikh; Editing by Susan Fenton)