The UK economy grew by just 0.3% in the first quarter – the smallest increase for more than two years. And the downturn in manufacturing continued into the second quarter, according to the latest survey of purchasing managers, and there is little to suggest an early improvement.

The latest quarterly survey of manufacturers by the CBI finds weakening orders, output and business confidence. Firms making furniture expect to do slightly better than the overall average on each of these measures but producers of timber, and other wooden products, are much less buoyant. On business confidence, for example, two-thirds of survey respondents are pessimistic about the future, compared with less than one-third in manufacturing as a whole.

In contrast, purchasing managers report significant expansion of activity in the housing, commercial and civil engineering sectors of construction. Official figures for the first quarter of 2001 show that work began on 7% more dwellings than in the previous quarter, with private sector starts up by a similar percentage.

These figures support other evidence of a pick up in housing. The value of home loan approvals rose smartly in March, to a record £12.4bn, says the Bank of England. The number of loans approved also increased – to 104,000, from 101,000 in February.

The housing market news coincides with reports of robust high street spending. The CBI says that retailers are upbeat about prospects for May, following strong demand in April. However, the healthy sales growth by furniture outlets during January and February, when more than 50% achieved year-on-year growth, tumbled in April when only 16% say they did more business than a year earlier. In contrast, stores selling DIY and hardware saw a vigorous expansion in sales.

The latest high street survey by the British Retail Consortium confirms that total sales grew strongly in April, although it says businesses in rural areas are under great pressure. It finds that demand for cheaper sofas benefited from spring promotions, but big ticket furniture sales are described as ‘sluggish’.

Against a background of weak inflationary pressures, the continued strength of domestic demand failed to deter the Bank of England from lowering its base lending rate on May 10 to 5.25%, its third quarter-point cut this year.

Admittedly the April price index which excludes mortgage interest payments rose slightly to 2%, from 1.9%. But in the 12 months to April the increase in the all-items retail price index slowed to 1.8%, from 2.3% in the year to March. The average high street price of furniture dropped by 1.7% in April – after a 3.6% hike in March – to an annual rate of just 0.3%.

Signs of inflation further back in the price pipeline are also absent from the April figures. Factory gate prices overall rose at an annual rate of 0.5%, down from 0.9% in March, although the new climate change levy added another 1% to industry’s costs. Exclude prices of food, drink and petroleum products and the annual increase in April was 0.3%, compared with 0.4% the previous month. Manufacturers’ prices of wood and wood products fell at a year-on-year rate of 0.4%.

The outlook for underlying retail price inflation is that it will edge up from 1.9% this year to 2.2% in 2002 and 2003, according to a new forecast by the London Business School and Oxford Economic Forecasting. Private consumption growth is projected to slow from last year’s 3.7%, to 2.9% this year, and slacken further to 2.5% in 2002 and 1.9% the following year. But amid uncertainties about the depth and duration of the US economic slowdown, any forecast for the UK should be interpreted with caution.
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