UK sectors seeing falling output hits highest level since May 2020

The number of UK sectors experiencing falling output reached its highest level in 29 months in October, as demand decreased, and businesses should ensure they have enough staff and cashflow to withstand forthcoming challenges, according to a new report from Bank of Scotland.

In October, 12 out of the 14 sectors covered by its UK Sector Tracker recorded a contraction in output, up from nine in the previous month and the highest number since May 2020. Additionally, all but one sector recorded a decrease in new orders, up from nine in September, as rising inflation caused more businesses and consumers to rein in spending and investment.

The Edinburgh-headquartered lender – part of Lloyds Banking Group, which last month reported its third-quarter results – noted that since July 2022, more than half of the UK sectors monitored by the Tracker have consistently reported falling output and demand, indicating that economic conditions have worsened in recent months. It also explained that a reading below 50 indicates contraction, and above expansion, and in October, demand for goods in the chemicals (29.5), metals and mining (31.1) and household products (38.4) manufacturing sectors fell at the fastest rate.

Conversely, providers of software services came in as the only sector monitored to see increased demand (59.7), and recorded the strongest output growth (60), followed by food and drink (58.4), which in turn saw the slowest fall in demand (49.9) of any manufacturing sector.

Jeavon Lolay of Lloyds Bank Corporate and Institutional Banking says some sectors and pockets of the economy 'continue to perform well'. Picture: contributed.

Elsewhere, the Tracker found early signs of a labour market slowdown, with employment (52.4) rising at the slowest rate in 20 months and manufacturing recording its first drop in headcount since December 2020. Relative to the previous month, four sectors (chemicals, metals and mining, household products and banks) saw a decrease in staffing levels in October, the highest number since February 2021 and in contrast to just one sector experiencing such a trend in September. Such firms said they chose not to replace workers because of lower customer demand or difficulty finding suitable replacements in a competitive jobs market.

Repair

Jeavon Lolay, head of economics and market insight at Lloyds Bank Corporate and Institutional Banking, said the key question concerns how long the UK’s downturn may last given that the turbulent backdrop “unlikely to materially recede” in the short term. “However, it is worth highlighting that there are sectors and pockets of the economy that continue to perform well,” he added. “The autumn statement laid bare the scale of the challenge ahead to repair the fiscal finances and restore growth. While the former inevitably necessitated some difficult decisions, the fact that fiscal and monetary policy are working together is clearly positive.”

Scott Barton, MD, Lloyds Bank Corporate and Institutional Banking, urged companies to forecast demand, but he added that this could prove “particularly challenging” for seasonal operators usually preparing for their busiest time of the year. “Businesses should model for different scenarios to determine whether they have enough staff and cashflow to cover operations at various levels of capacity in the coming months. This will help them to build resilience in the face of another challenging period,” he advised.

The survey follows a report from Royal Bank of Scotland stating that Scotland looked set to face an “extremely difficult period” after contraction across its private sector firms again fell in October.