Number of UK sectors reporting growing demand more than doubles
The number of UK sectors reporting growing demand more than doubled in December 2023, according to the latest Lloyds Bank UK Sector Tracker, amid relatively slower inflation and stable interest rates.
In December, seven of the 14 UK sectors monitored by the Tracker saw demand, as measured by new orders, increase – more than twice as many as in November 2023 (three).
Real estate delivered the strongest growth in new orders (61.5 vs. 54.9 in November), reflecting greater confidence as mortgage rates continued to ease.
The tourism and recreation sector, which includes pubs, bars, and restaurants, posted its first rise in demand for ten months (54.6 vs. 36.8 in November).
Software services (59.0 vs. 58.1 in November), metals and mining (56.0 vs. 43.1), banks (54.5 vs. 47.1), food and drink manufacturing (54.9 vs. 59.4) and technology equipment manufacturing (50.2 vs. 46.0) also recorded new order growth. A reading on the Tracker above 50.0 indicates expansion, while a reading below 50.0 indicates contraction.
Improved consumer outlook supports sales, but cost pressures persist
While robust festive spending boosted new orders for many businesses, particularly in consumer-facing sectors, the number of firms that said inflationary pressures were pulling down sales fell to an eight-month low of 4.24 times the long-run average in December (vs. 5.54 times in November).
This suggests that businesses and consumers were more confident in the outlook for spending as inflation ended the year markedly lower than in January 2023 (CPI 4.0% in December vs. 10.1% in January 2023) amid expectations that interest rates will be cut in 2024. December’s UK Sector Tracker data was collected before the December CPI figures were published.
However, the number of firms in December mentioning weaker demand due to inflation pressures was still higher than the long-run average, highlighting that customers in some sectors remained cautious.
Despite the rally in new orders, six of the 14 UK sectors reported output growth in December, one fewer than in November.
Software services posted the sharpest expansion in output of any sector (60.9 vs. 58.4 in November) as strong worldwide business investment in technology services helped to accelerate growth in this area of the UK economy. Supported by stronger sales, tourism & recreation recorded its first increase in activity since May 2023 (58.8 vs. 46.6 in November). Chemicals manufacturers (41.4 vs. 44.1) posted the sharpest contraction, as weak global demand for primary materials led to sluggish export sales.
Nikesh Sawjani, senior UK economist at Lloyds Bank Commercial Banking, said: “Signs that demand conditions improved in December are grounds for optimism as 2024 gets underway. Indeed, relative to the same point twelve months ago, 12 out of the 14 sectors we monitor reported higher confidence levels about their output prospects for the year ahead, with overall sentiment at its highest level since last May.
“Much of this increase in confidence, however, reflects hopes that interest rates will be lowered. Yet with the latest Sector Tracker data indicating that price pressures remain strong compared to historical standards, geopolitical tensions elevated and December’s slight rise in CPI inflation, the Bank of England may proceed more cautiously in lowering interest rates than financial markets currently expect.”
Annabel Finlay, managing director, food, drink & leisure at Lloyds Bank Commercial Banking, said: “The UK’s tourism and recreation sector ended 2023 with growing activity and order books, breaking long declines in both measures throughout much of last year.
“This is most encouraging to see for a sector that has weathered so many challenges these last four years. The uncertainty, however, will remain throughout 2024, with discretionary spend still being squeezed for many households. The hospitality sector may also need to compete even more on wages to attract staff, potentially increasing pressure on margins.
“As management teams press on with their growth plans for the year ahead, it will be critical to keep a firm focus on their risk management and working capital. This will help businesses both make the most of opportunities that future demand increases offer, and to successfully navigate the external environment and the volatility it may bring.“
