The Bank of England‘s attempts to reign in consumer borrowing and spending, and to cool the housing market, don’t seem to be working – at least not yet. And with the house price boom growing again, there is concern that an eventual bust could cause widespread damage to the economy.

The Bank, in common with many forecasters, predicts that the economy will expand by around 3.5% this year, well above the trend rate of 2.5%. But its prediction assumes a steady easing of house price growth to zero by 2005, which looks increasingly unlikely. According to Halifax and Nationwide, house price rises have rebounded to an annual rate of 18%.

As banks reported the fastest growth in mortgage lending in January for two years, and consumer credit grew by £10.6bn, sales in the high street rose by a more-than-expected 0.6%. At the annual rate, sales surged from 3.6% in December, to an officially estimated 6.4%, the strongest in more than a year.

The CBI says enthusiasm to spend continued into February, albeit weakening slightly. A quarter of furniture and carpet outlets reported an increase in volumes over a year before, down from 60% in January.

Consumer confidence

But there are signs that the November and February interest rate hikes are beginning to knock consumer confidence. Pollster Martin Hamblin Gfk says that optimism receded marginally in February, and the drop mainly reflected a fall in consumers’ intentions to make major purchases.

The recovery in manufacturing is increasingly difficult to interpret. Following a string of surveys indicating that orders were on the increase and optimism was rising, the February survey by the Chartered Institute of Purchasing and Supply/Reuters revealed new weakness. The index of activity growth fell to its lowest since September 2003, mainly due to slower growth in output and new orders.

Estimates of manufacturing output by National Statistics indicate a rise of 0.2% in January but no change between the two latest three-month periods. Overall wood and wood product output was up 2.8% in the three months to January, but output of office and shop furniture and of kitchen furniture fell by 10.2% and 11.1% respectively.

&#8220There is an added urgency for a squeeze on borrowing, and a less hesitant approach to inflicting some discomfort on consumers now, in the hope of forestalling real pain later”

At the factory gate prices rose at an annual rate of 1.6% in February, the same as the previous month, but raw materials and fuel costs shrank by 1.9% annually compared with a fall of 0.5% in January.

UK manufacturers’ prices for wood and wood products rose by 4% in the year to February, up from 3.4% in January. Their raw material and fuel bills rose by 1.3% over the year to February after an annual rise of 1.7% the previous month.

In the labour market, demand for permanent and temporary staff rose sharply in February, reports the Recruitment and Employment Confederation and Deloitte. They add that the number of available candidates fell for the fourth successive month and that pay rates rose strongly.

Construction growth

Construction expanded vigorously in February, according to purchasing managers. The latest CIPS/NTC Research survey shows a jump in the overall activity index to 58.3 from 56.3 in January, well above the 50.0 no-change mark. The improvement reflects an increase in the level of incoming new orders. But although activity in housing grew during the month, it was at the slowest pace since July 2003.

Adding to the Bank’s discomfort over the housing market, the long-standing explanation that prices are driven primarily by a shortfall in supply is under challenge. Research by Europe Economics for the Campaign to Protect Rural England suggests that there has actually been an increase in the number of dwellings over the number of households during the past decade in all regions apart from London. Instead of supply constraints, it argues that price volatility is due to demand-side factors such as wage and employment prospects and the expectations they generate.

Either way, there is an added urgency for a squeeze on borrowing, and a less hesitant approach to inflicting some discomfort on consumers now, and on timber’s end-user markets in the process, in the hope of forestalling real pain later.