UK recovery accelerates in May as tourism and recreation leads the way

Businesses that have borne the brunt of COVID-19 restrictions helped the UK’s economic recovery accelerate in May, according to the latest Lloyds Bank UK Recovery Tracker.

Eleven of the 14 sectors monitored by the Tracker reported faster output growth month-on-month during May, up from nine in April, as the UK moved further out of lockdown.

The tourism and recreation (62.4 in May versus 51.9 in April) and transport (63.2 versus 53.5) sectors reported the sharpest rise in output growth month-on-month. A reading above 50 signals output is rising, while a reading below 50 indicates output is contracting.

The former – which includes pubs, hotels, restaurants and travel agents – and the latter – which includes bus and rail operators, and providers of logistics services – both benefited from a release of pent-up consumer demand and domestic travel resuming during May. However, what is unclear is the extent of the impact that the four-week delay to further easing of lockdown restrictions will have on these sectors.

While the output of every UK sector monitored by the Tracker grew for the second consecutive month in May, healthcare growth slowed most markedly month-on-month (52.5 versus 58.5), making it the worst performing sector monitored by the Tracker for the first time since April 2019. Some pharmaceutical businesses commented on a slowdown in client spending after the surge in order volumes earlier in the pandemic.

Job creation across every UK sector

Tourism and recreation also reported an increase in employment for the first time since January 2020 as businesses benefitted from the relaxation of lockdown restrictions. Re-opening and pent-up consumer demand has already led to talk of labour shortages. However, it is likely that the delay to further easing of restrictions could see some reduction in hiring pressures – at least in the short term.

All 14 sectors monitored by the Tracker reported job creation during May, up from 12 sectors in April – the highest number since April 2015.

Manufacturers reported the strongest rate of job creation, with firms increasing their workforces to meet rising international demand for goods.

Record inflation may present challenge to UK recovery

While output and job creation continued to improve in May, rising inflation indicated business conditions may be less benign in the coming months. Every sector monitored by the Tracker experienced a sharp rise in input costs during May, with the rate of inflation for manufacturers hitting a 29-year high.

UK businesses increased their prices at the fastest rate since 1999 – posing challenges for the competitiveness of UK goods and services. Manufacturers of chemicals, and metals and mining products increased their charges to the greatest extent.

However, the Tracker also found early signs in May of an easing of supply chain disruption – a key driver of input cost inflation. The proportion of UK manufacturers citing shipping delays fell significantly month-on-month, from 23% in April to 16%, and reports of congestion at ports dropped from 37% to 24% in May.

Jeavon Lolay, Head of Economics and Market Insight, Lloyds Bank Commercial Banking, said: “When we look at the pace of growth, sectors that have been acutely affected by COVID-19 restrictions are now outpacing sectors that have been able to operate more freely during lockdown.

“Whether the four-week delay to further easing of restrictions will impact this trend is unclear. But while the delay is understandably disappointing for many businesses, there’s no denying that the economy is now on a much sounder footing.

“Ahead of this week’s Bank of England Monetary Policy decision, the UK Recovery Tracker also provides some useful insights on underlying price pressures across the economy. While UK inflation jumped higher than expected in May and stronger demand saw more businesses pass on rising costs to their customers, it’s arguably still too soon to worry about inflation spiralling out of control.”

Scott Barton, Managing Director, Corporate and Institutional Coverage, Lloyds Bank Commercial Banking, added: “May’s results show consumer demand is pushing the UK’s economic recovery forward. It’s particularly encouraging to see the performance of tourism and leisure businesses improve again.

“Even though the next step on the Government’s roadmap out of lockdown has now been delayed, we are hopeful that consumer-facing businesses will continue to recover over the summer months.”