Amid clear signs that the housing market is slowing, and new evidence of weakness in manufacturing, it came as little surprise that the Bank of England‘s Monetary Policy Committee decided at its September meeting to leave the interest rate unchanged at 4.75%. But with the Bank making its judgement on forecast inflation two years ahead, higher factory gate prices and a weakening pound strengthen the argument that borrowing costs have yet to peak.

The housing market was still strong in July. According to sale completion data collected by the Office of the Deputy Prime Minister house price inflation rose to 14.3% from 13.9% in June. But the market slowed in August with the forward looking indicator provided by mortgage approval activity, and price indices from Halifax and Nationwide, all weakening.

Housebuilders including Barratt Developments, George Wimpey and Taylor Woodrow have warned of a cooling market for new properties. However, with construction projects typically having a lead-time of up to 12 months or more, construction output, and demand for related timber products, should remain strong at least in the short term.

Purchasing managers expect growth in the construction sector to continue over the next year, after further steady growth during August. The expansion in housing slowed slightly, while construction of commercial projects grew at broadly the same pace as in July, but civil engineering slowed for the fourth consecutive month.

Construction orders rise

Official estimates point to a 12% increase in the total volume of new construction orders placed during the three months to the end of July, compared with the same time last year.

Private-sector housing orders rose 8% but public-sector housing dipped by 2%. Public-sector orders other than for infrastructure work jumped 22% but infrastructure contracts fell 7% compared with a year ago. Private commercial orders soared by 30% but orders for industrial works dropped by 21%.

Official figures on UK manufacturing show that output fell by 0.2% in July and has declined to the levels last seen in April. However, in the light of recent upward revisions to official figures on output in the second quarter, the underlying picture may be less bad than the latest estimates suggest.

The manufacturing data suggest that modest month-on-month gains were made in July by sawmills, veneer sheet and plywood, and builder’s carpentry and joinery producers. At the annual rate output of veneer sheet and plywood rose 19% and carpentry and joinery was up 10%, but sawmilling and planing fell by 3%. Production of wooden containers fell 1% in July but was 10% higher than in July 2003.

Meanwhile short-term business confidence has fallen, according to the August report by management services firm BDO Stoy Hayward. But although the output index has fallen sharply since the April peak, it indicates the probability of relatively strong overall economic growth of 3.3% in the fourth quarter. Longer-term business optimism continued to rise in August, suggesting that economic growth may reach 3.6% in the first quarter of 2005.

Consumer confidence

Among consumers, confidence is at the lowest seen so far this year. Pollsters GfK Martin Hamblin say that four out of the five measures which contribute to the headline result fell in August, most notably perceptions of the recent overall economic situation. Significantly too, the index which measures the perceived climate for making major purchases dropped to +7, from +11 in July. In August last year it stood at +19.

Nonetheless, the CBI reports that consumers were still buying furniture and carpets during August. Sales volumes were higher than a year earlier for a net 61% of retailers. This followed the discount driven performance in July, when 79% of outlets reported annual volume growth.

Official statistics confirm that August was a healthy month in the high street, with volumes 6.5% up on a year ago, although garden centres were among those who suffered the effects of poor weather. Clearly consumers still have spare cash to spend, and a continuing desire to spend it.