A few weeks ago the spectre of “stagflation”, the combination of flat output and rising prices, was beginning to emerge in the UK, according to several City analysts and commentators. Now the threat of higher inflation appears to have receded, but growth continues to wane.
In May, expansion in the previously buoyant services sector slowed, although the Chartered Institute of Purchasing & Supply/NTC Research index of activity stayed above the 50.0 mark, which divides growth from contraction, for the 26th month in succession. The fall followed publication of a related survey of purchasing managers in manufacturing, which signalled a sharp decline in activity during May.
It is clear that manufacturing is far from ready to take over from consumer spending as the engine of economic growth. And a prolonged downturn would spell trouble not just for the overall economy but for the timber industry too, as orders for products from wooden pallets to packaging would be at risk.
Factory output down
Factory output plummeted by 1.6% in March, to the lowest level since May 2003. The climate for manufacturers is clearly becoming tougher. Several euro zone countries are on the brink of recession and the global economy is slowing in the face of high oil prices – offering little prospect for an early pick-up in export demand. Official figures suggest that factory output bounced back in April, but the three-month trend remains firmly negative and shows factories still struggling for orders and reluctant to invest in new capital equipment.
The latest forecast by the CBI is for manufacturing output growth to slow from last year’s 1.5% to just 0.4% this year, before rebounding back to 1.5% in 2006. Oxford Economic Forecasting is less sanguine and predicts output growth of only 0.2% this year, and the Engineering Employers Federation has cut its forecast after the sector was seen to be suffering badly in the second quarter.
Growth in construction also experienced weakness during May. The CIPS activity indicator slipped from 54.8 in April, to 52.6. A sharp drop in civil engineering projects drove the decline, while house building was flat, and only commercial building work expanded.
New government figures for construction in the first quarter of 2005 suggest that the total volume of output rose by 1% compared to the same quarter last year. New work rose by 5% over the same period, although there was a fall in infrastructure projects. Repair and maintenance output fell by 3%, with declines recorded in all sectors.
Housing market
There are signs that the housing market is beginning to stabilise. The Bank of England says that home loans by banks and building societies hit a nine-month high of 95,000 in April. This compares with last November’s low point of the present downturn when mortgage approvals numbered only 77,000.
Nonetheless, estate agents surveyed in May by the Royal Institution of Chartered Surveyors predicted a further fall in average house prices due to a build-up of properties on offer. Annual property-price inflation eased to 5.5% in May, according to Nationwide. This is the lowest level since August 1996, but it is not expected to spark a dramatic revival in the market.
The latest measure of consumer confidence, provided for the European Commission by GfK Martin Hamblin, was more tempered in May than in March and April. Major purchase intentions fell from +12 in April to +5 as higher interest rates continue to put pressure on disposable incomes and encourage caution.
Weakness in retail sales continued in May, according to survey evidence. The CBI says consumer durable sales were particularly poor. Sales volumes fell year on year for a massive 77% of furniture retailers. The British Retail Consortium supports the view that retailers took a pounding but garden furniture struggled for buyers slightly less than did indoor furniture.
After growing by over 3% in eight of the last nine years, household spending rose at a yearly rate of only 1.3% in the first quarter of this year. Efforts to prise open consumer wallets look set to be the focus of monetary policy over the coming months: welcome to a new era of lower borrowing costs.