The number of UK sectors reporting greater output increased in June, according to the latest Lloyds Bank UK Sector Tracker. However, businesses across the economy saw weaker demand as inflation dampened customer spending.
In June, nine out of the 14 sectors monitored by the Tracker reported activity up, compared to eight in May and 11 in April.
June’s higher output was supported primarily by businesses working through backlogs of existing work, rather than growing demand. However, nine of the 14 sectors monitored by the Tracker saw new orders contract in June, one higher than in May (eight) and the highest number since January 2021.
Weaker demand was reported across both services (51.6 in June vs. 54.2 in May) and manufacturing businesses (48.3 in June vs. 51.1 in May). Goods producers were particularly hard-hit, recording the first fall in new orders after 16 consecutive months of growth. A reading on the Tracker above 50 indicates expansion, while a reading below 50 indicates contraction.
Input price inflation slows for first time this year
Although overall input costs continued to rise for UK businesses in June, the rate of increase softened, signifying the first slowdown in cost inflation so far this year. The Tracker registered a reading of 84.5, down from May’s record high of 85.9.
Slower input cost inflation has reduced pressure on firms to raise their own prices. The Tracker’s measure of inflation in prices charged to customers dropped to 68.2 2 – from 69.2 in May – to reach its lowest level since February 2022 (65.4).
In fact, the Tracker’s data also suggested that, in the seven sectors that did see stronger price inflation, those costs were not passed on to customers in full.
Employment momentum eases, as confidence levels fall
While 11 of the 14 sectors monitored by the Tracker registered overall employment growth in June, seven of these did so at a slower pace than in May, indicating a loss of hiring momentum.
Three sectors, transportation (47.3), chemical manufacturing (48.6) and food and drink manufacturing (43.0), reported that overall headcount levels had fallen.
This slowdown in hiring came as businesses expressed their lowest expectations of future output growth (63.9) since May 2020.
Optimism about future output growth has fallen every month since February, and June’s figure signals an expectation from companies surveyed that activity will slow considerably over the 12 months ahead.
Jeavon Lolay, Head of Economics and Market Insight at Lloyds Bank Corporate and Institutional Banking, said: “While it is encouraging to see UK economic activity holding up better in June, our data also shows clear signs that demand is weakening across a range of sectors.”
“Perhaps tellingly, most sectors we monitor reported a further deterioration in business expectations for the year ahead as high inflation increasingly takes its toll on households and firms.
“Our report suggests that concerns about demand are starting to outweigh a still intense pricing environment for many businesses. Despite cost pressures escalating, firms across a range of sectors chose not to increase their prices in June, perhaps for fear of weakening demand further. While this is positive news for inflation watchers, like the Bank of England, the growth picture looks challenging.”
Scott Barton, Managing Director, Lloyds Bank Corporate and Institutional Banking, said: “Although input cost inflation has eased, pressures remain acute compared to historical trends.
“Businesses will need to continue to keep a strong focus on their working capital to ensure they’re able to respond to new opportunities and manage potential downturns in trading. Funds locked in unsold stock, or unpaid invoices is money that can’t be quickly accessed for growth.
“This will be more important than ever in the face of current demand profiles. Not only will this affect potential revenue streams but could also result in firms having more money held in working capital than demand requires. Carefully managing this, along with input cost requirements, will be key.”