Drilling down into construction’s weak start to the year

The slowdown in quarterly GDP growth in Q1 begs the question whether the economy is too fragile to withstand a tightening in monetary policy anytime soon. But the slowdown was almost entirely due to weakness in the construction sector, which was buffeted by both the collapse of construction giant Carillion and severe weather at the beginning of March. Our evaluation of the evidence suggests that construction should recover in Q2, providing a modest boost to growth. Of greater concern is the weak services PMI reading for April, suggesting that the economy has lost a little of its underlying momentum. On balance, we think the fundamental drivers of our above consensus forecast for growth remain intact. As a result, we expect the data to improve in the coming months, allowing the MPC to raise interest rates in August. But we acknowledge that the risks now look skewed to the downside.