The UK looks set to continue as an island of stability and growth in Europe this year. The latest survey of forecasters’ predictions by The Economist suggests a vigorous 2.8% growth, following expansion of around 2% in 2003. In contrast, the euro area is expected to grow by 1.9% in 2004, up from just 0.5% last year.

In the third quarter of 2003 the UK economy grew at the fastest rate in a year, with large contributions from the service sector, and from consumer spending which rose by 0.9% during the quarter and by 3.4% compared with the third quarter of 2002.

Early evidence from key players in the high street suggests that the retail sector had a less dire Christmas than expected. Next, Boots and Dixons all reported reasonably good growth, and Marks & Spencer did less badly than forecast, as a result of which its share price rose. The CBI reports that sales were average compared with the past 10 years, while the British Retail Consortium says that like-for-like sales ended the month 0.2% lower than a year earlier, but up 2.3% in total.

On the downside, demand for furniture in December was “very poor” according to the BRC, and the CBI found that 3% of outlets saw volume demand sink below that of a year earlier. These findings reflect the latest poll by Martin Hamblin GfK which revealed that consumers seem to be steering clear of larger purchases.

Expenditure trimmed

The retail analyst Verdict Research expects spending on big-ticket items such as furniture to be trimmed in the coming months as household finances come under pressure from higher borrowing costs, weak growth in earnings and the rise in National Insurance contributions. But it still forecasts that high street spending will grow by 3.9% this year, slightly up on the 3.7% of 2003, then gather significant pace in 2005 with an increase of 4.5%.

The weakening housing market could also adversely affect sales of furniture and household goods. But slowing house price inflation is expected to cool the market rather than produce an outright collapse, while helping to restore affordability.

The Bank of England predicts that house price rises will drop to zero within two years. However figures from Halifax and the Financial Times show prices continuing to rise in December and the Royal Institution of Chartered Surveyors says that poor availability of properties will keep the upward pressure on in the first half of 2004.

On the supply side, housing construction expanded strongly in December, although it was less marked than in the two previous months, according to the Chartered Institute of Purchasing and Supply/NTC Research. The trend was repeated in the civil engineering sector, but activity in commercial construction rose marginally faster than in November. In the latest quarter, construction activity increased at the fastest rate since the second quarter of 2000.

Construction orders

Government figures indicate that new construction orders were 1% lower in the 12 months to October than in the previous 12 months, but private housing orders rose 8%. Private sector orders for industrial buildings fell by 9% and commercial orders by 12%.

Overall manufacturing output slipped back in November, with year-on-year falls in most wood and wood product sectors. But the manufacuring tide does seem to be turning. Purchasing managers say conditions improved during December at the fastest rate since 1999, with output and new orders remaining high. The employment index rose to its highest since October 1997 as manufacturers boosted their payrolls to meet rising demand.

Meanwhile, although capital investment fell by 1% over the year, corporate profitability among UK businesses, other than financial services, rose to its highest level in nearly four years in the third quarter, at 12.6%.