UK businesses are set to prosper over the next few months, but face the possibility of rising inflation and the risk of further interest rate rises after the general election. That, at least, is the view of management services company BDO Stoy Hayward, which adds that business optimism is at its highest level since 1997.

But the mood among firms in the timber and wood products sector, other than furniture, is downbeat. The CBI reports that a net 11% are less optimistic than three months earlier.

Fifty-two per cent of firms in the sector say they are working below capacity and the outlook for orders and output is flat, although a net 8% report that their order books are above average. Unit manufacturing costs are higher than three months ago for 45% of businesses, and 33% of firms plan to raise their domestic-market prices in the coming months.

Manufacturing output

The latest official figures on manufacturing indicate that output rose by 0.6% in December. It increased by 0.2% in the fourth quarter of 2004, and by 0.5% compared with the same quarter of 2003. Output from sawmills dropped 6% at the annual rate in the fourth quarter and builders’ carpentry and joinery was down 1%, but kitchen furniture output rose by 26%.

Government estimates of company liquidations in England and Wales show that the total in the fourth quarter of 2004 was 0.9% lower than the previous quarter and 11.1% lower than a year earlier. Numbers for the third quarter reveal that, in manufacturing, 17 timber and furniture businesses failed, compared with 14 in the second quarter and 21 in the third quarter of 2003. Individual bankruptcies in the sector during the second and third quarters totalled 21 and 19 respectively.

Some 388 construction companies went into liquidation in the third quarter compared with 435 in the second quarter and 406 a year earlier, while there were 434 and 402 self-employed bankruptcies in the second and third quarters respectively.

Growth in construction activity slowed in January, reflecting a fall in the pace of growth of new orders, according to the Purchasing Managers’ Index. Activity slackened in housing and commercial construction in January, and fell in the civil engineering sector for the second successive month.

The volume of construction output in the three months November to January is estimated by the National Institute of Economic and Social Research to have expanded by 2.1%. This compares with yearly growth of 3.2% in the quarter to December, and 1.1% in the quarter to January last year.

Meanwhile the volume of new orders placed with contractors in the fourth quarter of last year was up 4% on the third quarter and 11% higher than at the same time in 2003. Orders in 2004 as a whole rose by 6% compared with 2003.

High street activity

Conflicting evidence has emerged about activity in the high street during January. The CBI reports that sales fell overall to the lowest level since September, with 16% of furniture outlets achieving lower volumes than in the same month last year.

In contrast, the British Retail Consortium says that after the worst Christmas trading in a decade, with sales down 0.4% in the year to December, demand rose by an annual 0.5% in January. Demand for beds and fitted kitchens held up well, “but other big ticket items continue to struggle”.

But it is clear that consumers started 2005 in a more confident mood. The January poll by GfK Martin Hamblin rose four points, driven mainly by an improved climate for the purchase of major items. However, the result carries a warning that new year optimism is not uncommon at the time when high street sales are in full swing.

Looking ahead, Oxford Economic Consulting says that although consumer spending has slowed, recent indicators suggest that it is not about to crumble. The reasons for the “reasonably healthy” outlook include buoyant household incomes, as earnings and employment rise; record household wealth in relation to incomes; a lack of widespread financial fragility; and low interest rates.