Jump in UK sectors enjoying increased activity, but supply chain issues remain, says Bank of Scotland

Firms need to analyse “where to invest in their businesses while still protecting their working capital”.

The number of UK sectors reporting output growth hit a ten-month high in February, boding well for early 2024’s economic performance, but firms aren’t out of the woods and should have strategies to cope with revived disruption in the supply chain, according to a report out today.

Companies cited rising demand and spreading business optimism, according to the latest Bank of Scotland UK sector tracker, with ten of the 14 industries monitored reporting output growth last month. This was two more than in January, the most since April 2023 (which also reached ten), and “pointed to a broadening out of expansion across the UK economy”, according to the study.

Software services, including software consulting and data processing firms, saw output grow at the sharpest rate of any sector monitored in February (57.5), closely followed by financial services (57.4), which includes banks, insurers, and investment services firms. (A reading on the tracker above 50 indicates expansion, and below contraction.) Meanwhile, technology equipment (43.2) and tourism and recreation (45.7) saw output shrink at the fastest rates.

The number of UK sectors reporting output growth hit a ten-month high in February, according to Bank of Scotland, whose Edinburgh HQ is pictured (file image). Picture: Andy Buchanan/AFP/Getty Images.

Bank of Scotland, part of Lloyds Banking Group, said output growth in the service sectors monitored was driven by growing demand. Indeed, its index for demand among such firms, measured by volumes of new business, climbed to 53.5 – its highest level since May 2023. However, in manufacturing, new orders fell for an 11th month in a row (45.4), but the net balance of such companies expecting their output to be higher in a year rose to the highest level since August 2023.

Additionally, February data provided further indications that global supply chain disruption, along with wage pressures, was potentially starting to increase costs for UK businesses. The tracker’s composite index of input price inflation rose to its highest level in six months, and the rate at which prices charged to customers rose consequently also accelerated marginally, albeit less sharply than input expenses, which Bank of Scotland said suggested businesses were not passing the full extent of cost increases onto their clients. Furthermore, although the tracker’s measure of wage cost pressures dropped to a four-month low in February (1.47 times the long run average), pay packets continued to be a cited as a key cost driver.

Nikesh Sawjani, senior UK economist at Lloyds Bank, said: “Growth is continuing to spread to more and more parts of the UK economy as conditions improve. This positive momentum, alongside last week’s GDP data showing the UK economy expanded in January, provides more evidence that early 2024 is less likely to experience the pattern of economic contraction seen in the second half of last year.”

Scott Barton, MD, Lloyds Bank Corporate & Institutional Banking, welcomed increased activity across more parts of the UK economy. “However, the data also shows that the impact of renewed supply chain disruptions is a headwind that firms will need to carefully navigate. Similarly, if firms are ramping up production in anticipation of future demand, it’s critical that they consider how they can build the inventory they need and where to invest in their businesses while still protecting their working capital. Getting this balance right will mean they can… mitigate against any sudden movements in the economy or external environment.”