Chancellor Gordon Brown maintained in his pre-Budget report this month that economic growth in 2004 would hit 3.25%, and between 3-3.5% in 2005. This is sharply higher than the consensus view of experts, including the Bank of England and the Organisation for Economic Co-operation and Development, which is for growth of around 2.5% next year.

In its latest forecast, the CBI predicts the economy will grow by 2.5% next year and expand at a near-trend rate of 2.6% in 2006. Manufacturing output is expected to rise by 2.1% and 2.6% in 2005 and 2006 respectively, up from 1.3% in 2004.

Factory gate prices are set to rise by 2.7% in 2005 and by 2.2% in 2006, and consumer price inflation is expected to rise to near the 2% target by the end of 2006. Average earnings are forecast to rise by 4% in 2005, and by 4.4% in 2006. The base interest rate is anticipated to peak at 5% in the late spring of 2005 although the OECD projects that it will rise to 5.75% by the end of 2005.

The CBI expects that household spending growth will slow from 3.1% in 2004, to 2.3% next year and 2.4% in 2006, as higher interest rates take effect and the housing market cools. But although a tight labour market and lower unemployment will support growth of real disposable income, consumers will be less willing to take on new debt.

Soft landing

Instability in the housing market presents a risk to all these forecasts, “but it is diminishing, as the likelihood of a soft landing for the whole economy increases,” says the OECD. In one of several pessimistic forecasts of house prices Nationwide says growth will fall to around 2% in 2005; in contrast Halifax expects prices to fall by a similar amount. And the Council of Mortgage Lenders anticipates a rise of 4% during 2005. Mortgage approval numbers tumbled to the lowest level for nearly five years in October, says the Bank of England.

Nonetheless, construction activity is expanding strongly, according to the November survey of purchasing managers by NTC Research. The seasonally adjusted index of activity rose to 56.7 from October’s 55.0, reflecting a further hardening of underlying demand. All sectors of the industry – housing, commercial, and civil engineering – expanded and more than a third of companies received more new orders than in the previous month.

The total volume of construction output in the year to the third quarter of 2004 was 4% higher than in the previous year, according to official estimates. New work rose 7% and repair and maintenance was up 1%.

In manufacturing, activity grew at its fastest pace in four months according to the Chartered Institute of Purchasing and Supply/Reuters survey. The index rose to 55 in November, from 53.5 the previous month, and was buoyed by rising new orders from home and overseas.

Official figures indicate that output of builders’ carpentry and joinery fell by nearly 7% in the year to October, but production of kitchen furniture rose by 14%. Overall factory output dipped 0.5% in the year to October, the steepest decline since August 2003.

Consumer confidence

Confidence among consumers recovered marginally in November from September’s 18-month low, says GfK Martin Hamblin in a poll for the European Commission. But in the high street, appetite for big purchases slowed sharply. The CBI found year-on-year volume growth was achieved by only 16% of furniture retailers in November, compared with over two-thirds in October.

Meanwhile figures on corporate failures in the third quarter, compiled by business information company Experian, point to a year-to-date drop of 15% among forestry, agriculture and fishing firms, and a fall of 1% in the building and construction sector.

But the Bank of England raised some pre-Christmas cheer among home buyers, and companies whose profitability is under pressure, by leaving interest rates on hold in December.