The smooth adjustment to an economy balanced between the consumer, service and production sectors, which was clearly on the cards only a few months ago, now looks increasingly unlikely. Burgeoning household, and now government, spending together with rampaging house prices, are tipping the scales violently out of kilter as export-oriented manufacturers battle unsuccessfully for sales. Low interest rates, needed to help offset the global slowdown, are tilting the balance further by inflating house prices.
Official figures indicate that retail sales expanded by an average 4.6% between the three months to September and the same time last year, with non-food sales feeding off the housing boom to grow by 5.8% year on year.
The British Retail Consortium says that sales grew annually by 7.1% in October, compared with 6.3% in September. The CBI‘s October survey also finds evidence of a strong increase in sales during the month, following a summer lull. Further gains are expected in November. But wholesalers’ volumes rose only marginally in the year to October, according to the CBI.
Growth in household goods
Stores selling household goods reported the strongest growth last month, for the fourth consecutive time. But furniture volumes unexpectedly slumped, to produce the first annual decline of 2002, following two months in which almost a third of outlets reported an increase in annual volumes.
The strongest driver of future consumer spending will be income growth. Official estimates show that the headline rate of increase in average earnings was 3.8% in August, down 0.1% from July, but comfortably above the then inflation rate of 1.4%.
However, although consumers continue to prop up the nation’s economy, they are becoming aware that the global backdrop is less secure. UK consumer confidence overall, measured by Martin Hamblin GfK for the European Commission, fell in October to its lowest since December 2001 – when the full effect of the terrorist attacks in the US was impacting on consumers. Expectations about personal finances also weakened, while confidence in the general economic situation was the poorest since the end of last year.
Manufacturing uncertainty
But the manufacturing sector is where uncertainty about the future is causing most trouble. Factory output fell by 0.4% between August and September. Output was down 3% in the most recent three months compared with a year earlier, although production of kitchen furniture was up 1% in the year to September, and output of other furniture rose 8%. In contrast, sawmilling and planing production fell 11% and wooden container output dropped by over 8%. Builders’ carpentry and joinery output was broadly flat, despite the strength of construction, where activity is reported to be growing at an increasing pace.
The CBI speaks of hopes that manufacturing was on the brink of recovery, having been dashed by another decline in orders and output during October, accompanied by falling business confidence across the country.
But even in manufacturing there are signs of possible future growth. Last month’s CIPS/Reuters purchasing managers’ index of new orders remained above the critical 50% mark, which indicates expansion, for the eighth time since February.
Housing market
According to the purchasing managers’ survey, housing activity grew sharply in October, leading to lengthening delivery times for construction materials. But mortgage lenders report a surge in house prices as supply fails to keep pace with demand. Halifax estimates that prices are now rising at an unsustainable 31% annually – the biggest increase since the 1980s boom. Comprehensive figures from the Land Registry suggest that house prices rose 18% in the period July to September compared with the same time last year.
This all points to an economy which is vulnerable. The likelihood of serious pain when normality is finally restored appears more inevitable with every month that passes.
