Merchants report growth

Despite a rise in interest rates, low earnings growth, and political uncertainties, consumer confidence remained resilient overall in May, rising unexpectedly to a two-year high. Nonetheless, there is evidence that private consumption is beginning to slow.

In the latest GfK NOP survey of UK consumers for the EC, the only measure to deteriorate was attitudes to making major purchases such as furniture and electrical goods. The index that tracks these fell to +4, compared with +6 in April and +8 in May 2006.

In the high street, interest rates and bad weather weighed on shoppers during May. According to the British Retail Consortium like-for-like sales, stripping out the effect of additional selling space, rose by 1.8% compared with 12 months earlier – the slowest rate of growth since November 2006. DIY and gardening products were badly hit, and furniture business remained below year-earlier levels. The three-month trend rate of like-for-like sales growth fell to 2.8% from 3.3% in April.

High street volume growth

An earlier poll by the CBI suggested that high street volume growth slowed during May, and a further dampening is expected in June. Meanwhile official figures for April indicate that furniture sales volumes fell by 1% during the month, and by 4% at the yearly rate. The value of furniture demand slipped by 1% annually.

By contrast, the CBI reports that nearly two-thirds of builders’ merchants saw year-on-year volume growth during May, although this is a slight slowdown from the rapid expansion of the previous month.

According to the Chartered Institute of Purchasing and Supply (CIPS) and NTC, UK construction purchasing activity increased strongly during May. But this put extra pressure on suppliers and vendor performance worsened further, while lead times lengthened at the fastest rate for almost three years.

Price inflation of construction materials accelerated to a nine-month high in May, says CIPS, with higher prices for timber and steel widely reported. Buoyant growth in new orders and successful planning applications underpinned continued increases in construction activity. All sectors expanded, but the rise in commercial projects was the weakest.

The latest official estimates of total new orders placed with contractors indicate a 2% rise in volume terms between the two latest quarters to April and an 11% jump between the three months to April and the same period a year earlier. Orders for private-sector new housing rose by 9% in the three months to April compared with the previous three months, and by 11% annually.

Private housing output

Looking ahead, Market and Business Development forecasts that output of private housing will rise by 39% between 2007-2011. It will reach a value of £26.95bn at 2006 prices, and 186,343 units, by the end of the forecast period. Output in the smaller, social housing sector is expected to expand by 29% between 2007-2011 – to £4.5bn at 2006 prices.

In the shorter term, the UK housing market appears to be at a turning point, with higher borrowing costs and an increase in supply of properties slowing price growth. Nationwide Building Society says that prices rose by 0.5% in May, down from 0.9% in April, and demand for mortgages has weakened, together with unsecured borrowing. The Bank of England reports that approvals for mortgages fell for the third successive month in April, to 107,000. This compares with a six-month average of 119,000. It is also the lowest since September 2005 and is 16% down on the peak in the number of approvals reached last November.

The slowdown will be exacerbated by any further rise in interest rates – which is expected to follow an increase to the base rate to 5.75% by the end of the summer. But according to Oxford Economics, a re-run of the 2004-05 housing cycle appears increasingly likely, and that would point to interest rates being “on their way back down again before the end of the year”.