The media verdict was that the government had turned to a tax-and-spend strategy following the Budget. Some £8.5bn is to be raised from consumers’ pockets and corporate coffers in what amounts to a payroll tax. The increases do not take effect until the next fiscal year.
The more immediate concern is over interest rates. The Bank of England kept the base rate at 4% when it met on April 4, but a rise seems likely as consumer borrowing and spending have risen to alarming levels.
Personal borrowing increased by £7bn or 0.9% in February, compared with £6.9bn in January. The number of loans approved for home buying was 115,000, against 94,000 a year ago. And last year home owners borrowed £23bn against their homes to fund spending.
But finances of industrial companies are less buoyant. Profits among British manufacturers dropped from 8.7% in 2000 to 5.5% in 2000. Furthermore, overall productivity, measured by output per job, rose by 0.8% in the fourth quarter of 2001 compared with a year earlier. Annual growth in the previous quarter was 1%, and 2% in the first quarter of 2001.
In manufacturing, productivity declined by 1% over the year to the fourth quarter of last year, from a recent peak of 5.8% in the last quarter of 2000. Output per hour worked fell by an annual 2% in the fourth quarter of 2001.
Other official figures show manufacturing output rose during February for the first time since last summer by 0.4% and the industrial climate is described by one city analyst as ‘merely improving from disastrous, to bad’. However, the Chartered Institute of Purchasing and Supply‘s index of manufacturing activity rose in March to its highest level since February 2001. And for the first time since then, demand grew among producers of consumer, capital, and intermediate goods.
Output by British makers of kitchen and other domestic furniture, and wooden containers, rose strongly during February, although builders’ carpentry and joinery, and sawmilling production, slipped back.
Factory gate prices of wood and wooden products rose by 0.1% during March, but were unchanged compared with 12 months earlier, while raw material and fuel costs increased by 0.2% on the month and by an annual rate of 0.1%. Prices paid for raw materials and fuel by manufacturing overall rose by 2.2% but prices charged to domestic customers increased by only 0.1%, putting a further squeeze on margins.
At the consumer level, prices overall rose by 2.3% in March, after a 2.2% increase in the year to February. High street furniture prices rose 5% during the month, to an annual rate of 3.6%.
Turning to the construction industry, prices charged for materials are rising at an accelerating pace, and hit a 10-month high in March, according to purchasing managers. Delivery lead times from suppliers are also lengthening as demand strengthens. The index of new orders, in which 50 is the no-change mark, measured 59.8 in March, up from 55.5 in February, while there was a robust expansion of activity in housing, commercial and civil engineering sectors. Housing prices are now rising at an estimated rate of some 15%.
As prospects for economic recovery brighten, labour costs are likely to harden. This is confirmed by a survey from the Recruitment and Employment Confederation which shows that demand for staff is rising at its strongest rate since last April, and is accompanied by a return to upward wage pressures.
Worries about unemployment remain throughout most of the country, despite its recent fall to the lowest level since 1975. Research from Consumer Futures indicates that pessimism is at its greatest in the south-east outside London, and the south-west. Only in Northern Ireland and Yorkshire and Humberside do people think unemployment is set to fall. Nonetheless, 41% of consumers overall consider this is a good time to make a major purchase – up from 32% in the second half of last year.
