UK recovery accelerates as supply chain pressures ease

The number of UK sectors reporting output growth rose in January as supply conditions improved, according to the latest Lloyds Bank UK Recovery Tracker. 

However, businesses continued to face significant cost inflation, which translated into a record uptick in selling prices among service sector firms. 

The number of UK sectors monitored by the Tracker reporting output growth increased in January to 11 out of 14 – up from 10 in December, and the highest number since October 2021. 

UK chemicals manufacturers registered the fastest output growth of any sector monitored (66.9) due to a solid increase in new orders, after contracting in December (48.5). A reading above 50 signals output is rising, while a reading below 50 indicates contraction.

Meanwhile, fewer supplier delays helped automotive manufacturers’ output increase at the fastest rate in seven months (55.5 in January vs. 49.6 in December). Strong growth in the sector led to the first fall in backlogs of work for automotive and auto parts manufacturers since February 2021.

A number of service sub-sectors also saw strong growth, including real estate (61.3 vs. 54.2) and industrial services (60.3 vs. 53.7) as demand was boosted by hopes that the UK economy will continue its recovery in 2022. 

Concern over the Omicron variant and Plan B restrictions, which remained in place for the majority of January in England, hampered activity for consumer-facing businesses. 

Tourism and recreation – which includes pubs, hotels, restaurants and leisure facilities – continued to see output contract for a second month in a row (43.1 in January vs 43.2 in December). 

UK transportation – which includes airlines, hauliers and rail operators – fell for the first time in five months to register its weakest performance since August 2021 amid a renewed drop in passenger demand (49.0 vs. 54.3).    

Goods inflation softens, but service prices rise at unprecedented rate

Higher wages, energy bills and transport costs were evident as drivers of inflation across the entire UK economy in January. However, the latest Recovery Tracker pointed to diverging inflationary trends between manufacturers and services firms. 

The UK Recovery Tracker pointed to further improvement in supply conditions in January, including private-sector material shortages falling to a ten-month low. These improvements helped every UK manufacturing sector, except household goods, to record a weaker month-on-month rise in input prices. 

Food and beverages producers saw the biggest slowdown in cost increases – registering 73.2 on the Tracker’s Input Prices Index in January, versus 86.3 in December – followed by automotive manufacturers (77.2 vs. 86.6). A reading above 50.0 on this index signals costs are rising, while a reading below 50.0 signals them falling.

Although cost pressures remained intense, improved supply conditions helped UK manufacturers record the slowest rise in factory gate charges in eight months – registering 70.9 on the Tracker’s Prices Charged Index. This compares to a record-high reading of 74.3 in December.

By contrast, higher salary demands and energy prices contributed to the second-fastest increase in service sector input costs on record, registering 79.7 on the Input Prices Index (vs. 77.0 in December). 

This, in turn, contributed to UK service businesses increasing the prices they charged consumers at the fastest rate in the Tracker’s 25-year history, registering 62.6 on the Prices Charged Index in January (vs. 61.2 in December). 

Jeavon Lolay, Head of Economics and Market Insight at Lloyds Bank Commercial Banking, said: “An increase in the number of sectors reporting output growth in January is good news to start the year. 

“While consumer-facing service businesses have borne the brunt of Covid-19, high-frequency data show activity here also rebounding after restrictions were eased last month. If it goes ahead, the announcement that all Covid regulations could be abolished earlier than planned in England in the coming weeks should also translate into stronger consumer demand as the post-pandemic recovery further normalises.  

“Sharp focus will also be on how the divergent inflationary trends revealed in our report unfold in the months ahead. Persistently high wage and energy prices for service firms could ultimately lead to more sustained, or even higher, prices for consumers. However, January’s Recovery Tracker also had some tentative, early, indications that the peak of price pressures for manufacturers may have passed.”