Timber suppliers' optimism weakens

Suppliers of timber and wood products benefited from a continued increase in construction output in the second quarter of this year, which also helped to push overall economic growth to an officially estimated 0.8% – up from 0.7% in the first quarter. But although the Bank of England held the base interest rate at 5.75% in August, the robust economic expansion raises the odds on a further hike to 6% before the end of the year.

Sentiment about the general business situation among timber and wood product suppliers (apart from furniture manufacturers) has weakened slightly, according to the CBI quarterly survey to July. Six per cent of firms are more optimistic than three months ago, compared with 10% in the previous poll. The proportion of businesses working below capacity has fallen, to 56% from 84% in April.

But firms’ total order books have shrunk relative to ‘normal’ (from +10% in April, to +7%), while the volume of new orders rose over the past quarter for a balance of +19% of firms; this exceeded expectations, although the outlook for the next three months is broadly flat.

Manufacturing costs

Manufacturing costs are reported to be increasing as rapidly as in the quarter to April, while factory gate prices of timber and related products rose faster during the last quarter than in the previous three months. But they are expected to increase at a marginally slower pace during the next three months.

With profit margins remaining under pressure, the CBI poll reveals a further cutback in plans for investment in plant and machinery over the coming 12 months. However, the reduction in spending on buildings is now expected to be less severe than at the time of the previous poll (–7% compared with –26%).

Indeed, there is little in the outlook to justify outlays on additional capital equipment. Output has been flat over the last three months, and 7% of firms expect production to fall during the coming quarter.

Demand for UK-produced wood and wood products rose by 1.5% in June, taking the annual increase to 1.9%. In the quarter to the end of June output was up by 0.9%, and was 2.6% higher at the yearly rate. In the first quarter of 2007 it rose by 4.2% annually.

The purchasing managers’ index signaled a sharp increase in construction activity in July, despite a marked weakening in residential construction. Overall, new order growth was the fastest for more than 10 years.

Housing market

Further evidence from the housing market is mixed. Figures from Halifax indicate that house prices rose by nearly 12% in the year to July, although the monthly increase was lower than 1% for the fourth month in a row. Nation-wide building society’s inflation figures support the view that the market is slowing, and home repossessions rose by nearly 30% in the first six months of 2007 compared with the same time last year. But mortgage approvals remained strong in June, at 114,000, for the second consecutive month, and consumer credit rose by £900m – in line with the increase in May. However, consumers told GfK NOP their saving intentions are now the strongest for over 18 years. It is not seen as a good time for major purchases, with this index at its lowest this year and 13 points lower than in July 2006.

Consumers’ downcast mood is not yet reflected in retail sales revealed in business surveys and in official data. The CBI found that the high street enjoyed steady growth in July, although hopes of strong summer sales failed to materialise and rising interest rates hit demand for DIY and big-ticket items.

Sales volumes were lower than a year earlier for 14% of furniture retailers, the CBI says, but official figures suggest that volumes increased strongly at the annual rate, and the British Retail Consortium confirms that sales growth was only slightly down on June’s 14-month high.