The first figures to be released in 2005 on the timber industry’s principal end markets paint a fairly bright picture. Sales of furniture rose strongly in December and new orders are continuing to fire up the construction industry. But in the short term the strength of the housing market remains uncertain and its weakness looms as a potential threat both to timber product suppliers and to the overall economy.

Consumer confidence perked up as 2004 ended. The overall index improved to -3, up from -4 in November. The rise mainly reflected an improved climate for major purchases, which increased by three points to +8 and the highest level since July 2004.

Official figures reveal that although retail sales have slowed, they nonetheless remained healthy in December, with total volumes up 4.3% year-on-year. With seasonal adjustment to correct for the Christmas surge in spending, the rise is 3.2%.

In the three months to December, adjusted retail sales were just 0.3% higher than in the previous three months. This follows a rise of 1.1% in the three months to November, and is the smallest fourth-quarter growth since 1998. Sales by household goods outlets, which includes furniture stores, fell by 0.1% in the three months to December but rose 5.2% annually.

Among furniture and carpet retailers annual volumes grew for 43% of businesses in December, reports the CBI. This compares with an increase for only 16% the previous month. In contrast, the British Retail Consortium says furniture sales “remained difficult, especially the big ticket items”. However, it adds that sales of bedroom ranges and sofas were “good”.

Furniture prices

But shoppers saw prices of furniture jump by an average 8.3% in December, to a level 6.3% higher than at the same time in 2003. This helped raise the official consumer price index to 1.6%, and pushed the retail price index ,still used in many wage settlements, to 3.5% – the fastest increase for six years.

A sustained rise in consumer inflation would certainly accelerate the growth of labour costs. The market is already tight, with the employment rate and the number of people in jobs both rising in December, and the number of job vacancies also increasing. Official figures show that the rise in average earnings was at a three-year high of 4.4% in November – dangerously close to the 4.5% limit for non-inflationary increases.

Meanwhile interest rate increases last year successfully took some of the pressure off the housing market, but demand for mortgages appears to have stabilised. The Council of Mortgage Lenders reports a modest rise in the number of loans for house purchase in December, after four successive monthly falls.

On building sites the growth in activity is speeding up. The Purchasing Managers’ Index rose to 57.2 in December, from 56.7 the previous month – the fastest increase since last April. Activity grew strongly in the housing and commercial construction sectors, but civil engineering declined marginally, for the first time in four months.

Construction orders

The seasonally adjusted measure of new construction orders won by contractors in the three months to November fell by 4% in total. There were declines in public non-housing and private commercial work which more than offset rises in public and private housing, infrastructure, and private-sector industrial orders. In commercial property development, levels of activity continued to rise in December, according to Savills, but the pace of growth was the slowest for 19 months.

The UK economy is set for another year of expansion. The main risk for the immediate future is still the housing market, where prices have at best stalled since the summer. A further abrupt slowdown would put consumer spending, manufacturing and overall economic growth in peril.

However, with the present low interest rates a collapse in housing seems increasingly unlikely.