Major revisions to recent government statistics reveal that construction output grew by an unexpectedly strong 4.4% in the second quarter, after a fall of 1.8% in the first. In contrast, the consumer is now believed to have played a smaller part in underpinning the economy than earlier thought; retail sales growth in the second quarter has been scaled back from zero to minus 0.7%.

And the British economy grew overall twice as fast in the second quarter of the year as previously thought, suggesting that the slowdown which contributed to the Bank of England‘s July interest rate cut may not actually have occurred.

The housing market has rebounded: the number of loans approved for house purchase in August was an estimated 125,000, compared with an average of 105,000 in the three months to July – the largest number since October 2002. However, house price rises have slowed sharply, according to the latest Financial Times index.

On the supply side, new home starts registered with the National House-Building Council in August were up 16% compared with 12 months earlier, with the largest increase in Merseyside, the north-west and Wales. Private sector starts rose by 18% annually but housing association starts fell 6%. Total new build home completions rose at an annual rate of 4% in August.

Housebuilding growth

The index of housebuilding activity from the Chartered Institute of Purchasing and Supply rose in September for the fourth successive month. It showed the strongest rate of expansion since February, up from 60.4 in August to 61.6. Commercial construction activity also picked up in September, with an index reading of 56.1 from 53.8 in August. But infrastructure work eased to a three-month low, although it remained above the critical no-change level of 50.0.

The continuing growth in construction industry purchases is reflected in a rise in this index to 55.8 in September from 54.1 in August – the fastest increase since July 2001. The rate of input price inflation hit a three-month high, reflecting higher costs of some imports due to sterling weakening against the euro, together with tightening demand.

Meanwhile, official figures point to a fall in the value of capital investment by the private sector construction industry of 8.8% between the first and second quarters of this year, and of 9.6% compared with a year earlier. But spending on computer software soared by 184% between the second quarter and a year earlier, although outlays by the industry on hardware dropped by 29%.

But nearly 3,000 construction firms are likely to fold this year, business adviser BDO Stoy Hayward has warned.

Alarm bells

Alarm bells are already ringing for domestic furniture suppliers. Retail sales growth overall recovered in September, according to the CBI‘s survey, but furniture outlets were among those witnessing big declines. A balance of 53% of furniture retailers report smaller sales volumes than a year ago. This is the sharpest fall since May 1999 and follows an average year-on-year decline of 18% in each of the eight months from January to August 2003.

This increasing reluctance of consumers to make major purchases at present is confirmed by the September survey from Martin Hamblin GfK, although overall consumer confidence held steady during the month.

As the manufacturing sector appears to be turning around, with the September purchasing managers’ index at a 16-month high and official figures indicating that output rose 0.5% in the three months to August, the signs of a more balanced economic recovery are mounting. But with them come new questions over the timing of future interest rate changes. The consensus is that the pressure for a rise is not overwhelming, but it isn’t beyond the Bank of England to spring a surprise.