It was a mixed bag of UK economic figures which finally prompted the Bank of England‘s decision to cut interest base rates earlier this month to 3.5%, the lowest level in 48 years.
The Bank says its biggest concern is the “hesitant” recovery in the global economy. Certainly the eurozone remains in the mire. German output, which accounts for a third of the region’s total, is shrinking, with industrial production down 0.7% in May. The French economy grew by 1.1% annually in the first quarter of this year, while the Netherlands’ was up just 0.2% but industrial output fell 3.7% in the year to May. And the rise of the euro against the dollar is helping to push down forecasts of future growth across the zone.
The weakness in Europe, which is Britain’s most important trading partner, has put more pressure on UK manufacturers, and contributed to a 0.1% slowdown in economic growth at the start of the year compared with the fourth quarter of 2002.
Manufacturing output fell by 0.2% between April and May and by 2.1% from a year ago. In timber products, output of kitchen and other furniture fell 1.3% and 11.4% respectively in the year to May, while sawmilling tumbled nearly 16%. The bright spots were builders’ carpentry and joinery, up 2.2%, and veneer sheets and plywood, up 1%.
The June purchasing managers’ index offers some cheer for manufacturers, rising to its highest level since February, although still indicating a small contraction in activity. Further, investment goods production looks set for a second quarterly rise, indicating a possible increase in capital spending by industry. But companies are freezing recruitment and investment plans, according to a new survey by Lloyds TSB.
Consumer spending growth is continuing to weaken. Official figures for retail sales in May reveal a surprise fall of 0.1% on the month, the weakest performance since January’s 1% drop. In the latest three months sales grew 3.4% annually, the slowest rate since July 1999.
Survey evidence for June points to another disappointing month in the high street, with retailers reacting by a further cut in orders placed on suppliers. The CBI says sales of furniture in June were lower than a year ago for a balance of 14% of retailers – an improvement on April, when a massive 48% reported an annual fall. Overall, a balance of 10% of retailers report year-on-year growth in June, compared with 14% in May.
The British Retail Consortium confirms that year-on-year furniture sales weakened, the result of a stronger housing market in 2002, but cabinets and beds sold well this year.
The case against an interest rate cut is supported by another batch of economic trend data. Growth in the service sector is picking up, and sterling’s fall over the past few months has outweighed its recent small rise.
Probably the most important argument against a reduction in borrowing costs is the continuing rise in house prices. Although the pace of increases cooled in June, the market is still growing faster than expected. The Halifax reports an annual rise of 21.9%, while the Nationwide says it is nearer 19%. June saw increased activity in the home market, with agreed sales up 21% on the month, and exchanges of contracts 24% higher, according to the National Association of Estate Agents.
Demand for housing is set to stay strong so long as unemployment remains low, and activity in the housebuilding sector is accelerating, says the Chartered Institute of Purchasing and Supply. However, it says the pace of growth in the purchase of construction materials weakened in June, but suppliers’ delivery time lengthened nonetheless.
The case for lower interest rates is supported by the influential National Institute for Economic and Social Research, despite its forecast that the economy will have grown by 0.4% in the three months to June, up from 0.3% in the three months to May.
