While economic analysts were debating the likely future direction of interest rate changes, in the face of slower consumer spending and a cooler housing market, Bank of England governor Mervyn King stepped in with a clear statement that rates have probably yet to peak.

In financial markets, early-summer concerns that the base interest rate would peak at between 5.5-5.75% have been sharply trimmed, and now expectations are that the rate will stay on hold at 4.75% until the end of 2006. But already cracks are starting to appear in the timber industry’s key end markets – housing and furniture.

Fears for construction, and for housing in particular, have been stoked by downbeat assessments of trading in the autumn sales season by George Wimpey and MJ Gleeson.

The former, one of the nation’s biggest housebuilders, says the recovery in reservations since the traditionally less buoyant summer period has been limited. Gleeson believes sales are likely to remain stable, but is offering incentives to close some deals.

The latest from construction industry purchasing managers is that housing activity increased in September at the fastest rate for three months, and overall activity in the industry rose at the fastest since April. Furthermore, they say the rate of growth of new orders overall was the strongest since March.

Construction orders

Official figures show that orders for new construction placed with contractors in the year to August 2004 rose by 2% on the previous 12-month period, in seasonally adjusted, constant price terms.

In the three-month period June to August, orders rose by 11% compared with the same time a year earlier. Private sector housing orders were up 17% and public sector and housing association orders rose by 35%. Orders for industrial buildings, including factories and warehouses, were 9% lower in the three months to August than in the same period in 2003, while new orders for commercial projects rose by 20%. Infrastructure orders were 11% lower than a year before.

Commercial property services firm FPDSavills reports that new build and fitting out activity in the sector continued to expand in September, albeit at a slower pace than in August. Government office activity was unique in showing a decline from the previous month.

Revised data from government statisticians suggests that the value of business investment by the construction industry in the second quarter of 2004 was a massive 34% higher than in the previous quarter and when compared with a year earlier.

Purchases by the industry of computer hardware and bundled software rose 44% in the second quarter, and were more than double the outlay of a year before.

But from the high street comes fresh evidence of the highly competitive nature of the furniture trade. Retailer Courts has chalked up a pre-tax loss of £34.4m, compared with profit of £11.5m in 2003. A 0.7% decline in turnover at MFI has reduced its pre-tax profits to £32.1m from £59.3m the previous year, and like-for-like sales by DFS are down 2.9%.

The weakness in furniture sales has yet to show up clearly in survey evidence. Certainly the CBI‘s September poll found that furniture outlets witnessed a halving of the growth in August, but nearly a third of outlets nevertheless continued to report increased demand.

Furniture sales

The indications are that furniture sales are being bolstered by some substantial discounting promotions. The official retail index of high street furniture prices reveals that an annual increase of 3.3% in June was followed by a 0.1% year-on-year reduction in July. Prices stayed low, at 0.9% in August, but firmed up by 1.7% in September.

Meanwhile a fall in consumer confidence in September to its lowest level since March 2003, and signs that consumers’ appetite for major purchases was the weakest since December 1999, suggest that yet more discounting may be needed to keep the tills ringing in the nation’s furniture retailers.