Two successive monthly increases of a quarter percentage point in the interest base rate seem to have done the trick, as early signs show that the Bank of England‘s efforts to cool consumer spending and the housing market are paying off.
Rates are likely to edge up further, but there is now less danger that inflation pressures will threaten the Bank’s target, or that an abrupt halt to consumer or housing market activity will seriously damage growth prospects.
But although a slow cooling of consumer spending is good for the economy and for the timber industry in the longer term, the immediate impact will cause pain. The evidence suggests that overall consumer confidence began to wane in June. According to research by Martin Hamblin GfK, views about the desirability of making big purchases are now the weakest since last December.
House prices
A survey of consumer confidence by Nationwide confirms that stern warnings from the Bank of England governor Mervyn King about the dangers of a house price crash have helped temper expectations of further rises in the value of homes. And the Bank’s figures on mortgage equity withdrawal showed a small decline in the first quarter.
The CBI survey of retailing for June shows there were few signs of a consumer slowdown, despite a dip in sales growth following the record level of business in May. Sales of furniture actually strengthened, with 62% of retailers reporting annual volume growth, up from 48% the previous month.
But UK furniture manufacturers are only benefiting to a limited extent from the growth in consumer demand. In the three months to May, UK output of chairs rose 6% annually, while kitchen furniture was up 1%; output of other furniture dropped 5% over the year.
However, price constraints on furniture makers appear to be less than in other manufacturing sectors. Official figures point to an annual increase of 5% in the factory gate price of bedroom, dining and living room furniture in May, and a 4% boost for kitchen furniture producers. But material and fuel costs began to edge up in the year to May.
Makers of builders’ carpentry and joinery products pushed through an average 5% rise in factory gate prices during the 12 months to May, although output was up by only 2% annually despite the strength of construction.
The Chartered Institute of Purchasing and Supply reports that the overall rate of growth in construction activity speeded up during June. The sharpest increase was in commercial construction projects, while expansion of housing activity was only slightly less strong.
The construction industry remains strongly optimistic that activity levels would be higher in 12 months’ time than at present, says CIPS. However, the index which measures new order intake rose less strongly than in May but nonetheless continued to outpace that of activity, suggesting delays between the completion of existing contracts and the start of work on new projects.
Construction orders
Official figures on new construction orders placed with contractors during the three months to May show seasonally adjusted volumes 9% higher than in the previous three months and 13% up on a year earlier. Orders for private housing rose by 12% on a year before and orders for commercial buildings were up 29%, while industrial orders rose 4%.
In the housing market Halifax and Nationwide reported weaker house price growth in June and fewer enquiries, indicating that rate rises are starting to dampen demand. The financial futures market believes interest rates increases have further to go, possibly hitting 5.5% by the first half of 2005.
The danger now is to the modest cyclical recovery in UK manufacturing, which has been evident in official data for two consecutive months. Economists warn this may be scuppered if further increases in borrowing costs are any more than moderate.
