The number of UK sectors reporting a fall in output doubled in May, as inflation continued to drive down demand for goods and services.
The latest Bank of Scotland UK Sector Tracker showed that six out of the 14 sectors monitored saw overall output contract, compared to three in April.
This was the largest number reporting a fall in output since February 2021., although eight sectors still saw output growth - down from 11 in April - albeit five sectors showed a slower rate of month-on-month growth.
The slowdown was driven by falling demand, as consumers and businesses reined in spending amid record levels of inflation. Eight out of the 14 sectors monitored experienced a fall in new orders in May – the highest number since January 2021.
In response to this, it is expected that businesses will focus on balancing their levels of stocks, and to ensure they have sufficient raw materials ahead of any further price rises, but avoid having too much working capital tied up.
The tracker includes indices compiled from responses to S&P Global's UK manufacturing, services and construction PMI survey panels, covering more than 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 compared to the previous month, and below 50 an overall decrease.
Household product manufacturers registered the fastest decline in output of all 14 sectors in May (45.6 in May vs 48.5). This sector also reported report a steeper contraction in new orders (45.5 in May vs 48.6 in April) amid the ongoing consumer shift, post-lockdowns, towards spending on recreational activities, and more restrained consumer spending.
Meanwhile, food and drink producers saw output contract for the first time since July 2021 (47.5) as new order levels also fell (49.2 in May vs 53.3 in April). Firms attributed weakened demand to a slowdown in client stockpiling amid sharply rising prices.
However, manufacturers of technology equipment bucked the wider trend in May. Firms posted the fastest rate of output growth (68) of any sector, citing strong demand from businesses investing in their own operations.
Companies across the UK faced significant price pressures in May. The tracker’s composite Input Prices Index reached a record high (85.9) – exceeding the previous record set in April (83.5) and well above the 10-year average reading of 60.
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 grapple 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, driven by higher operating costs and recruitment challenges.
As input prices have risen, businesses have continued to hold back from fully passing on costs to customers. Moreover, the gap between the tracker’s composite Input Price Index (85.9) and the composite Prices Charged Index (69.2), grew month-on-month to (16.7) index points (vs. 14.1 in April).
The difference between the Input Price and Output Price Indices was greater amongst service businesses (17.8) than manufacturers (10.2), suggesting more intense margin pressures amongst service sector firms.
Jeavon Lolay, head of economics 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.
“Recently, the gap between input costs and prices charged was widest for manufacturers, primarily reflecting the impact of the pandemic on international supply chains and stronger relative consumer demand for goods than services.
“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,” he continued, adding: “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.”
Scott Barton, managing director, corporate and institutional coverage at Lloyds Bank Commercial Banking, said: “Continued input cost inflation means it’s more important than ever for businesses to ensure they have a healthy cashflow.
“With inflation at its highest point in 30 years, firms may face larger up-front operational costs than they have before, and a larger working capital requirement.
“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.”
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