Analysts are warning investors not to pin too much hope on the recent stock market rally, arguing that there are few signs of a sustainable world economic recovery or an upturn in corporate earnings to support the improvement. Nonetheless, news of even a 5% recovery in UK share prices will help bolster consumer sentiment.

Evidence from market researcher Martin Hamblin GfK is that although British consumers remain unhappy about their personal financial situation over the past year, they are becoming more optimistic about the future. Overall consumer confidence continued to rise in May, and the climate for making major purchases has improved markedly.

Housing market

But for timber and allied businesses there are new worries in the housing market. First-time buyers – crucial to the property-buying chain as well as to demand for furniture – are deferring purchase decisions in the hope that prices will fall.

From the supply side of the market, housebuilding activity declined in the year to May. Monthly house starts and completion figures are no longer published by the government, but data from the National House-Building Council suggests that total UK housing starts fell by 10% on May 2002, with private sector starts down 11%. Completions rose 1%, and an average of 497 new homes was sold each day during May, a 15% fall on the same month last year.

In contrast, official estimates show that orders for private housing placed with contractors in the 12 months to April 2003 were up 11%, while new orders from the much smaller public housing sector rose 7%. Total orders for all new construction work placed in the 12 months to April were up 9% compared with the previous 12 months. But in the quarter to April 2003 the total fell by 2% over the previous three months.

Construction activitiy

Construction industry purchasing managers report continued expansion in May as firms responded to growth in new business. However, the Chartered Institute of Purchasing and Supply index, which provides a snapshot of overall construction activity, fell to 52.8, from 53.4 in April, its lowest level since November 2001.

The CIPS survey shows that employment in construction rose for the 15th consecutive month in May, although the rate of growth was “only modest”. Figures from National Statistics reveal that the global economic slowdown is finally hitting the nation’s job market. The number of people unemployed and claiming benefit rose by 9,700, to 950,800 in May – the biggest increase since 1992. The number of people who are seeking work but are unable to find any rose by 36,000 in the three months to April.

Manufacturing sector

Average earnings across the economy were up by 3.2% annually in the three months to April, compared with 3.4% the previous month, largely reflecting lower bonuses. Earnings in manufacturing rose by 4.5%, despite a further fall in job numbers to the lowest in 20 years.

But the struggling manufacturing sector shows signs of moving out of recession, with a 0.3% rise in output during April, although it was still 1.1% lower than in April 2002. Output of builders’ carpentry and joinery was flat over the year to April, but kitchen and other furniture fell 6% and 18% respectively. Sawmill output dropped 12%.

Consumer activity also remains sluggish. Official figures show that sales volumes increased by just 2.7% in the year to April – down from 4.2% in March. The British Retail Consortium reports a like-for-like sales increase of 1.5% in the year to May, and the CBI says that sales remained weak in May, although there was a marginal improvement over the year.

Furniture and carpet sales plummeted in May according to the CBI, with 48% of retailers reporting lower volumes than a year earlier. The better news is that sales by builders’ merchants rose for 28% of outlets.