UK firms see output shrink amid inflationary headwinds

The number of UK sectors seeing output retreat doubled in May, as inflation continued to hamper demand for goods and services, according to a report out today.

The latest Bank of Scotland UK Sector Tracker has found that six out of the 14 sectors it monitors saw overall output contract, compared to three in April – marking the largest drop since February 2021.

However, eight sectors still saw output growth, down from 11, although five showed a slower rate of month-on-month expansion, according to the study, an “evolution” of the lender’s UK Recovery Tracker. A reading above 50 indicates expansion, and one below 50 contraction.

The Lloyds-owned bank said the slowdown was driven by consumers and businesses reining in spending against a backdrop of record levels of inflation. Eight out of the 14 sectors experienced a fall in new orders in May – the highest number since January 2021.

Bank of Scotland said businesses are consequently expected to focus on balancing their levels of stocks, and to ensure they have sufficient raw materials ahead of any further price rises, but it encouraged them to avoid having too much working capital tied up.

Household product manufacturers registered the fastest decline in output of all 14 sectors (45.6 in May vs. 48.5), while food and drink producers saw it contract for the first time since July 2021 (47.5). However, manufacturers of technology equipment posted the fastest rate of output growth (68) of any sector, citing strong demand from businesses investing in their own operations.

Firms across the UK faced major price pressures in May, the report also showed, and the Tracker’s composite input prices index reached a record high (85.9) – exceeding the previous record set in April (83.5).

According to the report, cost inflation was again highest among tourism and recreation firms, which includes pubs, hotels, restaurants, and leisure facilities (file image). Picture: Peter Summers/Getty Images.

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 wrestle 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.

Concerned

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. 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, MD of corporate and institutional coverage, Lloyds Bank Commercial Banking, said it is “more important than ever for businesses to ensure they have a healthy cashflow”, adding: “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.”