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Sector growth slows as rising inflation weighs on demand

Sector growth slows as rising inflation weighs on demand

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, eight out of the 14 sectors monitored by the Bank of Scotland’s 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.

The slowdown in output growth was driven by consumers and businesses reining in spending amid concerns over levels of inflation, with 11 out of 14 sectors recording 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.

The UK Sector Tracker is an evolution of the Bank of Scotland UK Recovery Tracker, using PMI data from S&P Global.

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, 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 and recreation – which includes pubs, hotels, restaurants and leisure facilities – saw output grow at the second-fastest rate of any sector monitored in April (65), 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).

The output of the transport sector – which includes airlines, hauliers and rail operators – also continued to fall, decreasing for a fourth consecutive month (46.1 vs. 49.7), as new business orders contracted at their fastest pace since February 2021 (42.6).

The manufacturing sector’s pace of order growth in April was the softest in 15 months. Manufacturers of metals and mining products registered the sharpest month-on-month drop in output (47.6 in April vs. 64.4 in March), as firms saw a contraction in new business (49.0 vs. 58.6).

Businesses’ own inflationary pressures rose at the fastest pace in 24 years of the tracker’s underlying data in April, amid a particularly sharp acceleration in costs across the manufacturing sector.

Six out of the seven manufacturing sectors monitored by the tracker reported faster input cost inflation. Firms were a record 16 times more likely than the long-run average to report higher energy costs and five times more likely to report more expensive material costs – the highest level since October 2021.

A spike in agricultural commodity prices underpinned record cost inflation for food and drink manufacturers for a second consecutive month, registering 96.8 on the tracker’s Input Price Index – up from 94.3 in March.

Meanwhile, incidences of supplier delivery delays increased for the first time since October 2021, with delays most common among technology equipment (22.4) and industrial goods producers (28.1).

Service sector costs in April also rose at the greatest extent on record, as businesses faced rising goods prices, salary pressures and energy costs.

Tourism and leisure firms recorded the fastest uptick in input prices of any services sector – registering 91.4 on the Input Price Index – followed by transportation businesses (87.6).

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Against a backdrop of rising costs, businesses increased what they charged customers at a record pace in April. The 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 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.

“While the strength of the UK labour market represents a major positive for consumers, firms continue to struggle to fill vacancies, which poses risks for faster wage growth and further increases in inflation in the year ahead.

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