The housing and construction markets are continuing to expand, while consumer confidence is high and spending on furniture and timber-based DIY products remains healthy. Yet manufacturing and service industries are increasingly worried about output, profits and job prospects.
Economic observer Philip Coggan, writing in the Financial Times recently, offers two possible explanations. The first is that, although firms are already suffering from the US slowdown, total unemployment in Britain is falling and consumers are spending away unaware of the impending problems.
The alternative scenario is that the problems of the corporate sector and the strength of the consumer sector are closely linked: the tight labour market is forcing the corporate sector to pay higher wages to retain staff, but it is unable to pass on the cost to customers because of the intensely competitive market. Mr Coggan argues that this makes life difficult for the Bank of England, which may want to cut interest rates to aid the corporate sector, but will be constrained by the strength of consumer demand. ‘If consumers keep splurging, the UK will eventually face a balance of payments crisis.’
Whichever of these explanations is nearer the mark, the economic soothsayers, who only recently were confident that the worst effects of the chill winds blowing across the Atlantic could be avoided, are now scurrying to revise their forecasts.
The Confederation of British Industry has cut sharply its growth forecast for this year to 2% from 2.5%, and predicts that 50,000 more jobs will be lost than previously estimated. Director-general Digby Jones warns, ‘the foot-and-mouth epidemic and the slowdown in America will be strongly felt in many quarters’ but, he adds, ‘the word "recession" should stay right off the agenda’.
At the same time the British Chambers of Commerce latest survey of manufacturing has reported a fall in domestic orders; the Institute of Directors has said that manufacturing confidence is near collapse; and the latest CBI survey of manufacturing reveals a further fall in demand, export orders well below normal, and weakening confidence in business prospects.
A slowdown in Europe could create its own difficulties for the UK too, and earlier this month the OECD slashed its forecast for euro-zone growth this year from 3.1% to 2.7%.
But reports from the high street suggest that consumers are shrugging off farm and share price woes. The latest retail sales figures indicate an increase of 1.6% in the three months to February – the strongest for three years.
Moreover, retail surveys show that spending growth remained robust during March. The CBI poll reports that sales during the three-month period to March were the highest since May 2000. There were strong annual increases in sales volumes of durables, including furniture, and hardware and DIY goods.
A high street survey by the British Retail Consortium confirms that sales grew strongly in March, and for the second consecutive month. But while furniture deliveries were strong, the intake of new orders was ‘not good’.
Consumer spending is backed by a solid housing market. Mortgage applications show no sign of a major downturn, and mortgage lender Halifax says that annual growth in house prices picked up from 0.9% during the last three months to 4.1% in March.
The Bank of England’s quarter point cut in interest rates this month means that home owners are set to enjoy the cheapest mortgages for 36 years. Besides benefiting the housing market, this will also give a further boost to sales of household goods.
In construction, business optimism is at a three-year high as the sector sees further robust growth. The latest Purchasing Managers’ poll reveals that both housing and civil engineering activity are strengthening, but so is the cost of materials.
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