UK Recovery slows as price pressures intensify

UK Recovery slows as price pressures intensify

 

The number of UK sectors reporting output growth fell in November, as record input cost pressure squeezed firms’ margins, according to the Lloyds Bank UK Recovery Tracker. 

Ten of the fourteen sectors monitored by the Tracker registered output growth, down from twelve in October. Only four sectors – Software & Services (61.5), Transportation (60.2), Chemicals (57.7) and Industrial Services (55.2) – posted faster month-on-month output expansion, two fewer than in October.

A reading above 50 signals output is rising, while a reading below 50 indicates contraction. The survey was taken before the emergence of the new Omicron variant of the virus.

Record input price pressure, as energy and salary costs soar

Technology Equipment firms – which includes producers of specialist parts in smart devices, motor vehicles, computers and industrial machinery – saw the most widespread input cost rises of any sector. The sector posted a reading of 99.7 on the Tracker’s UK Input Prices Index – up from 97.0 in October and a 2021 low of 68.9 in January – as businesses continued to face supply shortages of key input components and higher shipping costs.

Industrial Goods (91.5) and Chemicals (90.6) businesses saw the second and third highest prevalence of input price rises, respectively, while the Tourism & Recreation sector (90.5) saw the most widespread price rises of any service sector category.

Rising energy prices were an increasingly significant driver of cost inflation. In November, the number of UK businesses that said they experienced higher energy bills and fuel prices was 3.8 times higher than the pre-2021 average. This compares to 3.5 times the pre-2021 average in October.

Staff retention challenges continued to drive up salary costs, particularly within the UK’s service sector. In November, the number of companies reporting the need to increase salaries was a record 3.8 times the long-run average – up from a previous high of 3.4 times in October – as businesses competed to attract talent amid ongoing worker shortages.

Widening gap between firms reporting rising input and output prices threatens UK business resilience 

The Tracker also revealed a widening gap between the number of firms experiencing rising input costs and those raising output prices, signalling increasing pressure on margins that could potentially leave firms vulnerable to weakening demand and further input price shocks.

While an increasing number of businesses increased output prices in November, the gap between the UK’s Input Prices Index and Prices Charged Index grew to 18.9 – the biggest difference on record.

At a sector level, the UK Recovery Tracker showed that tourism and leisure had the biggest gap between its input and output price indices (31.6), while the software and services sector saw the smallest gap and therefore potentially the least pressure on margins (9.2).

Scott Barton, Managing Director, Corporate and Institutional Coverage, Lloyds Bank Commercial Banking, said: “Business leaders have been working hard to capitalise on higher demand, while facing the headwind of cost inflation.

“With uncertainty around the spread of the Omicron variant, businesses now need to respond to ‘plan B’ impacts in England and restrictions in the UK’s nations as well as overseas.

“Smart businesses will be ensuring their working capital position can support further pressures in costs or allows them to secure supplies in advance of their needs to ensure no interruptions.

“I’m confident businesses will approach the coming months with the same resilience, drive and creativity that has seen many continue to pursue growth, despite persistently challenging conditions.”

Jeavon Lolay, Head of Economics and Market Insight, Lloyds Bank Commercial Banking, said: “The lack of robust evidence on key aspects of the Omicron Covid variant casts a cloud over the UK’s economic outlook. While our report indicated a modest slowing in the pace of activity growth last month, both the new mandatory restrictions and voluntary restraint are clear headwinds to near-term growth prospects.

“However, a period of subdued demand is not the only concern facing firms. Cost pressures are rising at a record pace and across all the sectors we monitor. While there are early signs that some capacity issues may be easing, UK businesses are still contending with significant supply chain disruption and strong competition for skilled staff, putting upward pressure on salaries to retain and attract the people they need.

“What is particularly notable is that many UK businesses, facing rising input costs, are potentially choosing not to fully pass them on to their customers. How sustainable this will be remains to be seen. Ultimately, persistent or worsening price pressures could leave some with no choice but to eventually raise prices.

“With UK inflation potentially set to move higher in the coming months, the scope for the new variant to lead to a tightening of restrictions globally only adds to existing concerns. The Bank of England will therefore be paying close attention to both the growth and inflationary implications of Omicron this week.”       

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