According to the Lloyds Bank UK Sector Tracker, output growth in most UK sectors slowed in April as rising inflation weighed on demand for goods and services.
While the overall UK economy continued to grow in April, eight out of the 14 sectors monitored by the Tracker experienced a slower rate of output growth month-on-month – four more than in March. However, the number of sectors recording an overall increase in output remained resilient, dropping by only one month-on-month (11 in April vs. 12 in March).
The slowdown in output growth was driven by consumers and businesses reining in spending amid concerns over levels of inflation. Eleven out of 14 sectors recorded weaker demand for new orders in April – the highest number since July 2021. The economic headwinds have led to expectations that businesses are likely to respond by focusing on building in financial and operational resilience, including through strong working capital management and optimising inventory levels.
Businesses in the service sector continued to see overall order volumes grow month-on-month, despite the sector recording the sharpest slowdown in order growth. Between March and April, the Tracker’s service sector new orders index fell by five and a half points to 54.9, compared to a decline of 0.1 points in the equivalent manufacturing sector index (51.7). A reading above 50 on the Tracker indicates a rise, while a reading below 50 indicates contraction.
Tourism & Recreation
Tourism & Recreation – which includes pubs, hotels, restaurants and leisure facilities – saw output grow at the second-fastest rate of any sector monitored in April (65.0), behind only software and services (69.2), as firms continued to benefit from a relaxation in Covid-19 travel restrictions.
However, the sector’s pace of growth slowed month-on-month as firms reported a fall in new business for the second month in a row (56.6 in April vs. 63.6 in March and 64.5 in February).
Tourism and leisure firms recorded the fastest uptick in input prices of any services sector – registering 91.4 on the Tracker’s Input Price Index – followed by transportation businesses (87.6).
Against a backdrop of rising costs, businesses increased what they charged customers at a record pace in April. The Tracker’s Prices Charged Index posted a record increase from 68.3 in March to 69.4.
Price increases were most common among manufacturing firms, particularly automobile and auto parts (85.9) and food and drink (80.8) producers.
Despite inflationary pressures, UK businesses continued to raise their employment levels, with 13 of the 14 sectors registering a rise in employment over April – the same proportion as March as firms maintained efforts to clear staffing backlogs.
Jeavon Lolay, Head of Economics and Market Insight at Lloyds Bank Commercial Banking, said: “Consumers are becoming far more conservative in relation to spending as the cost-of-living rises – which in turn is having a direct impact on business’ output growth.
“Businesses are also battling intense cost pressures, with a record share of firms reporting raising prices to maintain margins. However, it remains to be seen just how much more they can pass on – with higher prices already having a sizeable knock-on effect on demand in some sectors.
“It’s encouraging to see sustained hiring across the economy, despite the more challenging backdrop. However, while the strength of the UK labour market represents a major positive for consumers, firms continue to struggle to fill vacancies. This poses risks for faster wage growth and further increases in inflation in the year ahead. A crucial factor will be the outlook for demand and how new orders respond to the rising cost of living.
Scott Barton, Managing Director, Corporate and Institutional Coverage, Lloyds Bank Commercial Banking, said: “Surging input costs and supplier delays will be top of the agenda in executive offices up and down the country.
“Strong working capital management will be key as firms look to navigate the uncertain landscape. While prices squeeze margins, and delays hinder production and delivery, cashflow disruptions will hold businesses back from capitalising on growth opportunities as they arise.
“Reviewing operational areas like supplier and customer payment time and optimising inventory levels will all help improve operational flexibility, putting businesses on the strongest possible footing for future growth ahead.”