Number of sectors reporting falling production doubles amid slowing demand


The number of UK sectors reporting a drop in output doubled in May as inflation continued to drive down demand for goods and services.

The Last Bank of Scotland UK Industry Tracker showed that six of the 14 sectors monitored saw their overall output contract, compared to three in April.

This is the highest number reporting a decline in output since February 2021, although eight sectors still recorded output growth – compared to 11 in April – although five sectors posted a higher rate of growth slow from month to month.

The slowdown was driven by weaker demand as consumers and businesses restrained spending amid record high inflation. Eight of the 14 sectors monitored saw a drop in new orders in May – the highest number since January 2021.

In response to this, companies are expected to work to balance their inventory levels and ensure they have enough raw materials before any further price increases, but avoid having too much tied up working capital.

The tracker includes indices compiled from responses to S&P Global’s PMI survey panels on UK manufacturing, services and construction, covering over 1,500 private sector companies.

The index is the sum of the percentage of “higher” responses and half the percentage of “unchanged” responses, with a reading above 50 indicating an overall increase from the previous month, and below 50 an overall decrease.

Manufacturers of household products recorded the fastest drop in production of the 14 sectors in May (45.6 in May against 48.5). This sector also reported a more pronounced contraction in new orders (45.5 in May vs. 48.6 in April) amid consumers’ continued post-lockdown shift towards spending on recreational activities and spending. more limited consumption.

Meanwhile, food and beverage producers saw output contract for the first time since July 2021 (47.5) as new order levels also fell (49.2 in May from 53.3 in April). Firms attributed weaker demand to a slowdown in customer stockpiling amid sharply rising prices.

However, tech equipment makers bucked the overall trend in May. Companies posted the fastest output growth rate (68) of any sector, citing strong demand from companies investing in their own operations.

Jeavon Lolay, Head of Economics at Lloyds Bank Commercial Banking

UK businesses faced significant pricing pressure in May. The tracker’s composite input price index hit a record high (85.9) – surpassing the previous record set in April (83.5) and well above the 10-year average reading of 60.

Rising cost inflation was driven by the services sector, which saw input costs rise at a record pace (85.8) as businesses continued to grapple with higher energy bills and costs higher salaries in a context of fierce competition for staff.

For the second month, cost inflation was highest among tourism and leisure businesses, which include pubs, hotels, restaurants and leisure facilities. Companies here posted 93.3 on the tracker’s input cost index, due to higher operating costs and recruiting issues.

As input prices have risen, companies have continued to refrain from passing the costs on to customers in full. In addition, the gap between the composite consumer price index (85.9) and the composite invoice price index (69.2) increased from one month to the next to reach (16.7) index points (compared to 14.1 in April).

The difference between input and output price indices was larger among service firms (17.8) than among manufacturers (10.2), suggesting more intense margin pressures among firms of the service sector.

Jeavon Lolay, head of economics at Lloyds Bank Commercial Banking, said: “High inflation is dampening consumer demand and increasingly weighing on businesses’ ability to pass on rising costs.

“Recently, the gap between input costs and invoice prices was widest for manufacturers, primarily reflecting the impact of the pandemic on international supply chains and stronger relative consumer demand for goods than for services.

“The reversal of this trend reflects both changing consumer habits and the fact that service providers are increasingly concerned about the potential fragility of customer demand,” he continued. , adding: “However, widening price pressures in the economy also point to the risk of more persistent inflation and therefore more policy tightening by the Bank of England.

Scott Barton, Managing Director, Corporate and Institutional Coverage at Lloyds Bank Commercial Banking, said: “Continued inflation in input costs means it is more important than ever for businesses to ensure they have a healthy cash flow.

“With inflation at its highest level in 30 years, businesses may face higher upfront operational costs than before and a greater need for working capital.

“Any excess funds tied up in idle inventory, unsold inventory, or items such as unpaid invoices are funds that cannot be used to pursue new opportunities, wherever they arise.”

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