Deteriorating demand sees more UK sectors contract
The number of UK sectors reporting output growth dropped to its lowest in eight months in July, as demand for goods and services tumbled in the face of persistent cost-of-living pressures, higher interest rates and unseasonably wet weather, according to the latest Lloyds Bank UK Sector Tracker.
Of the 14 UK sectors monitored by the Tracker, 13 saw a drop in new orders in July, with only software services bucking the trend (60.5 in July vs. 51.2 in June). Consequently, ten saw output fall, three more than in June, with software services (53.8 in July vs. 50.1 in June), metals and mining (53.5 vs. 49.0), industrial services (52.0 vs. 52.1) and household product manufacturers (51.1 v 49.6) reporting expansions in activity. A reading on the Tracker above 50.0 indicates expansion, while a reading below 50.0 indicates contraction.
Higher prices were widely cited as a key reason for weaker demand. In July, the number of firms reporting that businesses and consumers were reining in purchases due to price hikes rose to more than nine times the long-run average (9.01 vs. 8.95 in June) – the highest level in 2023 so far.
Rainy weather also dampened demand for hospitality businesses, which had a knock-on effect on activity across its supply chain. The tourism and recreation sector, which includes pubs and restaurants, saw new business decrease at the fastest rate for nine months (42.3 vs 43.2 in June) as parts of the country saw the wettest July on record.
This fed through to weaker activity at food and drink manufacturers, who saw order books contract for the first time since October 2022 (38.0 vs. 64.4), and output drop sharply (37.1 vs. 67.7). Of particular concern for food and drink manufacturers will be the rate of deterioration in the new orders and output indices in July, which fell by 26.4 and 30.6 points respectively, month-on-month. Outside of April 2020, during the first Covid lockdown, such sharp monthly declines in this sector have not been recorded in the survey’s 25-year history.
Pessimism over future output spreads amid inflation concerns
In July, 11 of the 14 sectors monitored by the Tracker were less optimistic that their output would be higher in a year’s time, three more than in June.
Businesses increasingly expected higher prices to dampen future activity growth (5.91 times the long-run average vs. 4.72 times in June), suggesting firms were adjusting their outlook to reflect an expectation of ‘sticky’, persistent inflation.
Nikesh Sawjani, senior UK economist at Lloyds Bank Corporate & Institutional Banking, said: “This month’s data clearly indicates a slowdown in activity across the economy, largely driven by a further material weakening in demand. In the face of higher interest rates and still relatively rapid price rises, businesses and consumers are being more careful about how they spend their money.
“On one hand, this suggests that interest rates are having their intended effect. But demand and activity will continue to be closely watched. Output in the private sector is now only marginally expanding, and it’s clear that many businesses are downgrading their expectations for future output growth as they settle in for what they believe will be a period of prices pressures that are stronger than hoped and may last for longer than previously anticipated.”
Scott Barton, managing director, Lloyds Bank Corporate & Institutional Banking, said: “These conditions are posing new challenges and considerations for management teams.
“A sustained softening of demand may lead businesses to adapt their pricing strategies in order to attract, and retain, customer spend, resulting in a more intense and competitive environment.
“However, firms will be wary of the increased pressure this could place on margins. It’s crucial that any changes to pricing strategies are accompanied by watertight cashflow and working capital management plans, and supported by insights into supply chain and customer trends, such that businesses can act with confidence.”
