Instead of basking in the expected spring warmth of recovery, British business is facing a two-pronged threat from rising oil prices and interest rates.
Despite Saudi Arabian efforts to persuade OPEC countries to up their output of oil, at the time of writing the price has soared to a record high of US$41 a barrel – and energy markets are braced for a long period of trading above the US$40 mark.
High oil prices will hit growth by increasing trade deficits, diverting consumer and business spending from other goods and services, and by putting pressure on inflation and hence forcing up interest rates.
The Bank of England warned this month that borrowing costs may have to rise faster than markets had expected, as it forecast consumer price inflation in 2006 would breach the government’s target of 2%. The end of the cheap credit era will impact strongly on the markets served by the timber and related industries – particularly on housing and furnishings – as well as on corporate profits and expansion plans.
Interest rate pressure
Pressure on the Bank is already building. The interest rate rise to 4.25% on May 6 was spurred by the labour market, where unemployment is at a record low of 2.9% and some 195,000 new jobs were created in the first quarter. The tightening market had pushed up earnings to an annual rate of 4.3% in March, the fastest for three years.
House prices continue to shrug off interest rate increases, defying forecasts of an imminent slowdown or collapse. But the Organisation for Economic Co-operation and Development was prompted to warn this month that the housing boom is the factor most likely to put the economy at risk.
The volume of orders for new construction placed with contractors in the first quarter was 14% higher than in the previous quarter, and up 1% on the first quarter of 2003.
Purchasing managers report that the start of work on new contracts, and strengthening order books, supported a further increase in overall construction activity in April. The price of materials and supplies rose again during the month, at a faster pace than in March, and lead times lengthened.
Industry recession
British industry officially slipped back into recession in March, confounding a string of optimistic surveys in recent months. Figures indicate that manufacturing output fell by 0.3% on the month, and by 0.5% between the two latest quarters.
The picture in the timber sector is mixed. Output of builders’ carpentry and joinery fell 8% during March, despite the buoyant construction market, and kitchen and other furniture fell 10% and 2% respectively. In contrast, production of veneer sheets and plywood rose by 3% and output from sawing and planing companies held steady on the month.
The latest snapshot of timber and wooden product manufacturers other than furniture makers, provided by the CBI, suggests that a fifth of firms are optimistic about the general business situation. The same proportion says that order books are below normal for the time of year, but 25% expects that output and new orders will increase in the next three months. Orders and plant capacity are cited as the factors most likely to limit growth in output in the coming months.
Twenty-five per cent of firms told the CBI they expect average unit manufacturing costs to rise in the second quarter. A similar percentage expects to raise prices on the domestic market, but few see scope for any increase in export markets where price remains the dominant constraint on sales.
The outlook for capital investment in the sector is also weak. Seventeen per cent of firms say they will spend less on plant and machinery in the next 12 months than in the past year, while 6% will cut outlays on buildings. However, 21% plan to boost to spending on training, market research and design.
