Tourism and recreation experienced the sharpest fall in output of any UK sector in September, according to the latest Lloyds Bank UK Sector Tracker.
Output in the sector, which includes pubs, hotels, restaurants and leisure facilities, contracted at the fastest pace (36.3) since February 2021, when the UK was last in lockdown.
The drop was caused by demand – represented by new orders – falling for a fourth consecutive month (38.5) as consumers reined-in discretionary spending amid rising inflation.
However, five of the 14 UK sectors saw output grow in September (vs. three in August), while the same number saw new orders grow (vs. three in August)*.
Output growth was highest among software service providers (55.8 vs. 63.1 in August), followed by healthcare firms (53.6 vs. 47.8). A reading on the Tracker above 50.0 indicates expansion. In contrast, the metals and mining sector was closely behind tourism and recreation in posting rapid output contraction (38.2 vs 57.4).
Weaker demand was felt by most services businesses across the UK economy. However, providers of software services was the only entirely service-based sector monitored by the Tracker to see new orders rise (52.6 vs. 57.8 in August).
Elsewhere, the Tracker showed that overall input cost inflation for businesses intensified in September for the first time since May (77.4 vs. 76.6 in August). The increase was driven by rising energy prices for manufacturers, reported by a record number of firms, surpassing a previous peak during the 2008 oil price shock.
However, while cost inflation accelerated month-on-month, there were positive signs of a gradual improvement in price pressures quarter-on-quarter.
Between Q2 and Q3 2022, the average pace of input cost inflation slowed in all 14 sectors monitored by the Tracker. This was supported by easing wage and shipping cost pressures – with reports of higher shipping costs reaching a 21-month low in September.
Meanwhile, the pace of inflation in prices charged to customers slowed in 12 sectors.
Jeavon Lolay, Head of Economics and Market Insight, Lloyds Bank Corporate and Institutional Banking, said: “Inflation returned to double digits, reaching 10.1% in September.
“While we expect UK inflation to remain stubbornly high in the coming months, there are clear signs of an easing in pipeline cost pressures in our latest UK Sector Tracker report. In the third quarter, output prices rose more slowly in 12 of the 14 sectors we monitor, meanwhile input cost inflation moderated across all 14 sectors compared to the previous quarter.
“That’s not to say that businesses won’t continue to face intense cost pressures, but suggests that peak inflation is near. This will be welcome news for both businesses and consumers.
“However, the recent news that the energy price guarantee scheme from April will prioritise support for the most vulnerable means that what happens to wholesale energy prices will, again, have a significant bearing on UK inflation from then on. The Bank of England will need to assess carefully prospects for both inflation and growth as it considers just how much more tightening is needed.”
Scott Barton, Managing Director, Lloyds Bank Corporate and Institutional Banking, added: “Management teams are facing a difficult balancing act. They must adapt to make sure they’re not overtrading amid weaker demand, while ensuring that they’re still in a position to respond to any new growth opportunities.
“Maintaining strong working capital management will be key to helping walk this fine line. By making sure that funds aren’t unnecessarily tied-up in working capital, businesses will be in the strongest possible position to capitalise on rises in demand ahead.”