After a year in which the British economy grew strongly, albeit at the cost of higher inflation and with weaker consumer spending, economists polled by the Financial Times see the prospects for 2007 more positively than in either of the two previous years.
Despite hitting an 11-year high 3% in December, analysts believes inflation will fall as last year’s energy price rises drop out of the calculations, and particularly if wage settlements in the new year are benign. At the same time, many refused to predict what the Bank of England would do with interest rates. In the City this month’s rise to 5.25% was seen as a done deal and some dealers have priced-in a further mid-year quarter-point rise.
An expected cut in public expenditure is probably the greatest potential threat for the construction industry, the growth of which is expected to depend on continued government spending and on the ability of local authorities to pursue repair and maintenance work.
Construction product sales strengthened in the fourth quarter of last year. And the Ernst & Young/Construction Products Association measure of activity in the industry recorded a score of 67, well above the 50 ‘no change’ level and indicating continued recovery after a disappointing first half of 2006. Sales of light-side products, including doors, windows and kitchen furniture, grew particularly strongly.
The separate Purchasing Managers’ Index indicates a high rate of construction activity growth in December. It rose to 57.5, from 54.8 the previous month, reflecting improvements in all sectors.
Construction firms raised their purchasing activity at the strongest rate for three months in December, in response to the increased overall activity and new orders.
Housing market
Continued economic growth, rising employment and an ongoing shortfall will underpin expansion of the housing market in 2007, at least in the near term. The Bank of England reports that the number of mortgage approvals in November was well above the previous six-month average, and the highest since December 2003.
It is too early to assume that the fall in house prices between November and December identified by Halifax foreshadows a sharp slowdown, although chief economist Martin Ellis warns that higher interest rates and subdued real earnings growth are likely eventually to restrain demand.
British companies, other than those in the financial sector, achieved a record average return of 15.2% on capital in the third quarter, according to National Statistics. This suggests that investment spending will build on its recent recovery and help drive the 2.75% annual economic growth estimated by the chancellor in his pre-budget statement.
According to the Chartered Institute of Purchasing and Supply the recovery in manufacturing earlier in 2006 ended the year on a subdued note, with the weakest growth in December since March.
Official estimates of October output of sawmilling and planing, and of kitchen furniture suggest a year-on-year fall, but production of other furniture, builders’ carpentry and joinery, wooden containers, and veneer sheets and plywood all posted annual gains.
Consumer spending
Meanwhile there is evidence that consumers have become more hesitant about making major purchases, including furniture. In its December poll for the European Commission, GfK NOP found a decline in confidence, and in consumers’ expected purchasing activity to a level lower than in December 2005.
Early indications of December high street sales, provided by the CBI, suggest that up to the middle of the month volumes were markedly stronger than at the same time in 2005. Anecdotal evidence points to a mixed sales performance over Christmas, amidst heavy discounting. More than one-in-five furniture retailers reported yearly increases, compared with two-thirds who suffered a drop in annual sales 12 months earlier.
