The timber industry’s principal end markets – construction and furniture – have held up reasonably well over the summer, thanks largely to borrower-friendly interest rates which the Bank of England appears likely to maintain for at least the next few months.

The economy as a whole is still jogging along, with unemployment at a 27-year low and wages continuing to grow.

However, the mood in private business in both the UK and mainland Europe has deteriorated sharply over the past six months. The index of business confidence among European firms backed by venture capital group 3i has fallen below the level in February, eliminating the gain recorded in May. The index fell most sharply in the UK where companies also believe that the economic and political climate is now less favourable to expanding or to starting a business.

Investment plans weaken

In addition, the survey shows that while company profitability expectations are broadly unchanged, investment intentions have weakened – thereby casting doubt on future non-housing construction orders.

Optimism among consumers appears to be in better shape, however, bolstered by the still strong housing market. Overall confidence levels were unchanged in August despite a fall in the rating of the general economic situation over the past 12 months. This is now at its lowest since autumn 2000, says Martin Hamblin GfK, which carried out the poll of consumers for the EC.

Weakening consumer attitudes to spending are reflected in the latest CBI retail survey. The pace of high street sales fell to its slowest for nearly two years in August, sparking fears that the main driver of the economy is running out of steam.

Furniture demand

The most pronounced declines in sales were among hardware and DIY outlets. In contrast, furniture enjoyed strong demand growth for the second successive month. The British Retail Consortium describes August as “an exceptional month for furniture and floor coverings”, accompanied by buoyant demand for laminated flooring. But as retail sales slowed overall, the CBI says wholesalers’ volumes fell below those of a year earlier for the second month in succession, and fewer orders were placed with suppliers.

Prices of domestic furniture in the high street rose at an annual rate of 2.4 in August and average prices of DIY materials rose 0.3% according to new government figures. The all-items measure of consumer price inflation eased to 1.4% in August – down from 1.5% in July.

Outlook uncertain

The outlook for manufacturers overall remains uncertain. Output rebounded by over 4.9% in July, after dropping 5.5% in June, as production patterns were distorted by the Jubilee holidays. Output by most sectors of the UK timber and wood products industry saw a similar recovery in July. It ranged from 13.4% for veneer sheets and plywood, to just 1.2% for builders’ carpentry and joinery.

Strong competition is forcing manufacturers to keep prices, and margins, down.

Official estimates indicate that UK factory gate prices rose by 0.3% overall in the year to August, and average prices of wood and wood products increased by a similar percentage. Manufacturers’ home-market prices for sawn and planed wood increased at an annual rate of 0.7%, while container prices were up 0.8%. Kitchen furniture costs fell 0.3% but other domestic furniture prices rose by an average 0.3%. Prices of builders’ carpentry and joinery are now increasing at an annual rate of 0.9%.

Some construction industry purchasing managers, responding to the Chartered Institute of Purchasing and Supply‘s latest survey, report a sharp increase in average input costs during August, although the chief culprits are steel and petroleum products.

The good news is that the cost increases appear to reflect supply shortfalls in what was the 43rd successive month of expanding construction activity.