17th February 2023 – For the first time in six months, all 14 sectors monitored by the Lloyds Bank UK Sector Tracker expect their output to grow over the next year, up from 13 in December.
According to the Tracker, improved optimism was driven by expectations of weaker inflation over the next 12 months. The number of businesses citing that they expect inflationary pressures to weigh on output this year fell to a 10-month low (5.3 times the long-run average vs. 10 times the long-run average in December).
Of the 14 sectors monitored, in January 11 reported more buoyant output growth expectations than in December.
The UK metals and mining sector (74.1 versus 58.6 in December) saw the largest month-on-month rise in output expectations of any sector, followed by tourism and recreation (59.6 versus 47.7 in December) – which includes pubs, hotels and restaurants. Transportation (54.2 versus 51.9 in December), and food and drink manufacturing (72.7 vs 70.0 in December) reported the lowest increases.
A reading above 50.0 indicates an expected increase in output over the next 12 months, while a reading below 50.0 indicates an expected decline.
Input cost inflation weakens, but salary pressures prove sticky
The more positive outlook came as the Tracker recorded a sixth consecutive month of declining output across the UK economy (48.5 in January vs. 49.0 in December) – the longest continuous period of contraction since the 2008 financial crisis.
A reading above 50.0 indicates expansion, while a reading below 50.0 indicates contraction.
Positively, the rate of input cost inflation (71.2) across both manufacturing and services slowed, with the lowest monthly increase since May 2021, supported by weaker energy cost pressures.
However, businesses suggested that strong wage pressures have prevented input cost inflation from falling more quickly. The number of survey respondents citing that operating expenses have risen due to increases in staff salaries was 2.3 times higher than the long-run average in January.
Jeavon Lolay, Head of Economics and Market Insight at Lloyds Bank Corporate & Institutional Banking, said: “Hopes that inflation has peaked underpinned a broad-based recovery in business confidence in January. For the first time since last July, all 14 sectors monitored by the UK Sector Tracker anticipate positive output growth in the year ahead. This cautions against an overly pessimistic view of the economic outlook, although the impact of sustained high inflation and past increases in interest rates will inevitably weaken demand over the coming quarters.
“Given the improving economy-wide expectations for output growth, employment trends may remain robust as businesses maintain staffing levels to capitalise on prospective opportunities. However, this could pose a problem for the Bank of England if it means that wage pressures and domestically generated inflation prove to be more persistent.”
Scott Barton, Managing Director, Lloyds Bank Corporate and Institutional Banking, added: “Businesses have shown huge ingenuity and resilience to capitalise on growth prospects so far, in what has been a challenging environment.
“Management teams are recognising opportunities but certainly won’t be blind to the hurdles that remain. In these conditions, prioritising financial flexibility, ability to deploy resources to manage both unexpected downturns and upticks in trading, will be crucial.”
