Pace of UK recovery slows as Omicron impact bites

Omicron stalled the growth of consumer-facing businesses in December, as manufacturers benefited from easing supply chain pressure, according to the Lloyds Bank UK Recovery Tracker.

Despite headwinds that resulted in an overall slowing of the pace of the UK’s economic recovery, the total number of UK sectors monitored by the Tracker reporting output growth held steady month-on-month – with growth in 10 sectors in both December and November.

Activity in the tourism and recreation sector – which includes pubs, hotels, restaurants and leisure facilities – contracted for the first time in nine months in December (43.2) as concern over the Omicron virus variant impacted consumer behaviour. A reading above 50 signals output is rising, while a reading below 50 indicates contraction.

UK transportation – which includes airlines, hauliers and rail operators – experienced its first loss in momentum for four months, recording its weakest output growth since August 2021 (54.3).

In contrast, three of the manufacturing sectors monitored by the Tracker registered a stronger month-on-month performance in December, supported by strong demand and easing supply chain pressures.

This included manufacturers of household products, which saw output growth accelerate to the fastest rate since June 2021 (56.7 in December versus 52.2 in November), manufacturers of technology equipment (60.1 vs. 53.1) and industrial goods (52.2 vs. 50.0).

Business capacity issues remain, with staffing a major concern

The number of firms reporting an inability to meet demand due to staff or material shortages continued to ease from its peak in September 2021. However, the level remained elevated relative to the long-term average. In December, the number of firms reporting rising backlogs due to staff or material shortages, was around five times the long term average, compared with September when it was over six times the long term average.

According to the Tracker, UK companies were more likely to report capacity challenges stemming from staff shortages than counterparts in the Eurozone. The potential for the availability of qualified candidates to remain tight, and competition for talent to translate into further wage pressures could lead to high inflation in 2022 lasting for longer in the UK than in the Eurozone, even if supply chain pressures continue to ease.

All of the fourteen UK sectors monitored by the Tracker reported rising input costs in December, with wages remaining a key driver of costs – particularly for service sector businesses. Overall, UK firms were 4.3 times more likely than the long-run average to report an increase in their wage bills as businesses sought to attract and retain skilled talent, up from 3.8 times in November.

At the global level, the UK remained one of the countries with the largest gap between the Tracker’s input and prices indices – signalling more acute pressure on firms’ margins.

In December, the gap between the UK indices registered 15.2 index points, the joint-second highest with Italy, as Spain registered 17.2, which is well above the global benchmark of 9.5. This could fuel inflationary risks if businesses look to alleviate margin pressures through future prices rises.

Jeavon Lolay, Head of Economics and Market Insight at Lloyds Bank Commercial Banking, said: “While consumer-facing businesses, like those in travel and hospitality, unsurprisingly bore the brunt of consumer concern over the Omicron variant in December, the resilience shown in other service sectors and manufacturing helped soften the impact on the economy as a whole.

“Further signs of optimism were evident in data showing supply chains slowly recovering and staff numbers rising in all sectors with the exception of tourism and recreation.

“However, the cost backdrop remained acute as higher energy prices and wage bills pushed up firms’ expenses. It’s no surprise that an increasing number of firms plan to raise their prices in the year ahead, indicating rising and potentially sustained domestic inflationary pressure.”