The year 2007 ended with sharply weakening demand for domestic furniture, as the housing market deteriorated and cautious consumers tightened their belts in the face of rising energy bills, scarcer credit and falling confidence. And there is scant room for optimism that demand for furniture will pick up this year.

Furniture retail sales volumes fell by 8% in December, taking the yearly rate of decline to nearly 5%, official statisticians report. At current prices, sales, which include lighting purchases, dropped by around 4.5% year on year. In 2007 as a whole, volumes were down by 2%, after an increase of 2% the previous year. In value terms, sales were up 1% last year, following an increase of 4% in 2006.

Official figures on the value of home furniture and furnishing sales in the third quarter of 2007, before the credit crunch hit consumers, indicate that demand was marginally lower than in the second quarter, and was up nearly 4.5% annually. But without the effect of price changes, the volume of spending in the third quarter is estimated to have been 2% higher than in the previous one, and up 1% on the same period a year before.

The British Retail Consortium reports that, in November, demand for bedroom and living room furniture was stronger than for bathroom and kitchen furniture. December was a more difficult month for sales despite heavy discounting, it says, with many buyers waiting for the January sales and even larger discounts.

The CBI forecasts that yearly consumer outlays will have risen by around 3% in 2007 as a whole, but will grow by under 2% this year and next. But the risk of a housing- and consumer-led recession in the economy is judged to be low, according to a new assessment by the Ernst & Young ITEM Club, using the same model of the economy as the Treasury.

In a forecast published in November, Oxford Economics predicted that overall spending on consumer durables will drop by nearly 4% in 2008, after growing by 6% in 2007 and before rebounding to a 3% annual growth rate in 2009. Assuming further cuts in borrowing costs this year, and a relatively gentle decline in the housing market, growth in spending on household goods is expected to remain fairly steady at around 1.5% in 2008.

But the analysts see furniture underperforming the sector, due to its high sensitivity to changes in the housing market. They forecast an annual rise of approximately 2% in 2008 in value terms, and average yearly increases of about 3.5% in the period 2008-11. Volumes are set to increase by 1% this year and by a similar annual average over the forecast period to 2011.

Overseas suppliers of furniture to the UK boosted their sales by 7% overall in the year to the third quarter of 2007, with imports of kitchen furniture up a massive 78%. Furniture exports by British companies rose by 6% over the same period, but the gap between imports and exports rose to £810m compared with £755m in the third quarter of 2006.

Output of kitchen furniture by UK manufacturers for the domestic and export markets combined, fell by 1% annually in the fourth quarter of last year. Demand for chairs and seats – destined for both home and commercial markets – was up 10%, but shop and office furniture fell by nearly 6%. Output of kitchen furniture was down by 1% and that of other furniture fell by 3%.

UK manufacturers’ prices of furniture at the factory gate rose by nearly 4% in the year to December, while their raw material and fuel costs increased by 5%.

According to the latest CBI survey of furniture makers, which found them in a downbeat mood, with a balance of 41% of firms more pessimistic than three months ago, manufacturing costs are expected to rise in the next three months by 35% of the industry. But prices charged to domestic market buyers are predicted to rise by only 11%, and export prices are expected to remain flat.

January ended with some good news as consumer confidence edged up – albeit only marginally – and remained in negative territory.