The number of UK sectors reporting a fall in output doubled in May, as inflation continued to drive down demand for goods and services, according to the latest Lloyds Bank UK Sector Tracker.
Six out of the 14 sectors monitored by the Tracker saw overall output contract, compared to three in April. This was the largest number reporting a fall in output since February 2021. However, eight sectors still saw output growth, down from 11 in April, albeit five sectors showed a slower rate of month-on-month growth.
The slowdown was driven by falling demand, as consumers and businesses reined in spending amid record levels of inflation. Eight out of the 14 sectors monitored experienced a fall in new orders in May – the highest number since January 2021.
In response to this, it is expected that businesses will focus on balancing their levels of stocks, and to ensure they have sufficient raw materials ahead of any further price rises, but avoid having too much working capital tied up, restricting investments elsewhere.
Household product manufacturers registered the fastest decline in output of all 14 sectors monitored by the Tracker in May (45.6 in May vs. 48.5). This sector also reported report a steeper contraction in new orders (45.5 in May vs. 48.6 in April) amid the ongoing consumer shift, post-lockdowns, towards spending on recreational activities, and more restrained consumer spending.
Meanwhile, food and drink producers saw output contract for the first time since July 2021 (47.5) as new order levels also fell (49.2 in May vs. 53.3 in April). Firms attributed weakened demand to a slowdown in client stockpiling amid sharply rising prices.
However, manufacturers of technology equipment bucked the wider trend in May. Firms posted the fastest rate of output growth (68.0) of any sector, citing strong demand from businesses investing in their own operations.
The UK Sector Tracker is an evolution of the Lloyds Bank UK Recovery Tracker. It uses PMI data from S&P Global to shed light on current trends in the UK economy. A reading above 50 on the Tracker indicates expansion on an index, while a reading below 50 indicates contraction.
Cost inflation hits new record high in services, as firms hold back on raising prices
Firms across the UK faced significant price pressures in May. The Tracker’s composite Input Prices Index reached a record high (85.9) – exceeding the previous record set in April (83.5) and well above the 10-year average reading of 60.0.
The rise in cost inflation was driven by the service sector, which saw input costs rise at a record rate (85.8), as businesses continued to grapple with higher energy bills and wage costs amid fierce competition for staff.
For the second month, cost inflation was highest among tourism and recreation firms, which includes pubs, hotels, restaurants, and leisure facilities. Firms here posted 93.3 on the Tracker’s Input Cost Index, driven by higher operating costs and recruitment challenges.
As input prices have risen, businesses have continued to hold back from fully passing on costs to customers. Moreover, the gap between the Tracker’s composite Input Price Index (85.9) and the composite Prices Charged Index (69.2) grew month-on-month to (16.7) index points (vs. 14.1 in April).
The difference between the Input Price and Output Price Indices was greater amongst service businesses (17.8) than manufacturers (10.2), suggesting more intense margin pressures amongst service sector firms.
Jeavon Lolay, Head of Economics and Market Insight at Lloyds Bank Commercial Banking, said: “High inflation is dampening consumer demand and increasingly weighing on the ability of companies to pass on rising costs. Our latest UK Sector Tracker shows service businesses having their margins squeezed more tightly than manufacturers.
“Recently, the gap between input costs and prices charged was widest for manufacturers, primarily reflecting the impact of the pandemic on international supply chains and stronger relative consumer demand for goods than services. The reversal of this trend evidences both changing spending habits and that service providers are becoming more concerned about the potential fragility of customer demand. However, the broadening of price pressures across the economy also points to the risk of more persistent inflation and therefore more policy tightening by the Bank of England.
“All eyes will remain fixed on forthcoming UK activity and inflation data to assess the potential scale, pace and timing of further rate increases from the Bank of England.”
Scott Barton, Managing Director, Corporate and Institutional Coverage, Lloyds Bank Commercial Banking, said: “Continued input cost inflation means it’s more important than ever for businesses to ensure they have a healthy cashflow.
“With inflation at its highest point in 30 years, firms may face larger up-front operational costs than they have before, and a larger working capital requirement.
“Any excess funds tied up in unused inventory, unsold stock or elements like unpaid invoices are funds that can’t be used to seize on new opportunities, wherever they arise. Optimising their finances will help ensure firms have the maximum possible liquidity to help them be flexible in their operations and trading and to continue where possible to pursue their growth objectives.”