Gloomy business surveys of manufacturing and retailing conditions in April point to an economy which is losing steam, although construction remains in relatively good health despite a slowdown in housing. But weak domestic consumption is not being offset by the hoped-for rise in exports and industrial investment.
The survey of purchasing managers in manufacturing revealed the first decline in activity in two years. This was due mainly to a fall in new orders and reflected anaemic export demand. An earlier poll by the CBI revealed the weakest level of orders for almost two years in the first quarter of 2005.
Official estimates show that output by sawmillers in the first three months of the year was broadly flat compared with a year earlier. Builders’ carpentry and joinery, and kitchen furniture were up 5%, while other wooden furniture rose 4%.
In the CBI’s survey of retailing in April 14% of respondents overall reported a year-on-year drop in sales volumes. But the downturn was significantly worse for furniture retailers, with a net 58% reporting an annual slump in sales, following a massive 72% with sagging sales in March. The British Retail Consortium confirms that sales of furniture were well down in April and the month was “very tough”.
Consumer confidence is reported by business services firm Experian to be on the rise as people feel more positive about their finances and less fearful of a house price crash. But others say the buying public remain cautious and will save more in 2005, making it a tough outlook for retailers and house marketeers alike.
Construction activity
Construction activity continued to expand in April, says the Chartered Institute of Purchasing and Supply. Its index was unchanged on the month at 54.8, with the 50 mark separating growth from contraction. But new home building activity fell for the second successive month, after six years of growth.
The volume of orders for new construction won by contractors in the first quarter of 2005 was an estimated 2% lower than in the first quarter. This was due to a fall in all sectors except commercial building and infrastructure projects. Total orders were down 6% annually.
New housing orders in the first quarter, for the private and public sectors combined, were down 5% compared with both the previous quarter and with the first quarter of last year. Commercial project orders rose by 4% in the first quarter but fell 23% annually.
Company failures
New data on UK company failures show that the number rose in the first three months of 2005 for the second consecutive quarter, and the upward trend is forecast to continue throughout this year. Experian says the number of building and construction industry insolvencies rose by 6% to 373. One reason cited for the rise in failures is the increase in cash flow problems down the supply chain. It estimates that companies now take an average 60.8 days to settle – the longest since the introduction of late payment legislation six years ago. Construction firms take an average of 59.2 days, up 1.1 days on a year ago, and timber firms are taking 59.3 days, up 0.6 days.
UK manufacturers were able to reduce the gap between costs and prices in April, taking some of the pressure off profit margins. The annual increase in prices of wood and wood products slightly outpaced the rise in input costs for the second successive month. But for industry overall, core costs rose by 6.9% year-on-year while factory gate prices rose by only 2.7%.
The slowdown in retailing, manufacturing and the housing market probably helped persuade the Bank of England to keep key interest rates at 4.75% in May, despite its own new forecast of above-target levels of inflation in the near term. How long the rate will be maintained is a subject of continuing debate among economists and City analysts, and at present there is no consensus, even on the direction that any future change will take.
