Bank of Scotland tracker: Number of business sectors growing doubles but trading 'remains fragile'

The number of business sectors reporting output growth more than doubled last month, though the trading environment “remains fragile”, Bank of Scotland said today.
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Seven of the 14 sectors monitored by the Lloyds/Bank of Scotland UK Sector Tracker flagged output growth, versus just three in November, marking the highest number since last June. Despite the recovery, overall UK economic activity remained in negative territory in December, with an index reading of 49. Any reading above 50 on the tracker indicates expansion, while a reading below that mark denotes contraction.

Software services firms (56.8 versus 47.5 in November) and UK automotive manufacturers (53.1 against 38 in November) posted the fastest rises in activity. The tourism and recreation sector (50.2 versus 44.6 in the previous month) - which includes pubs, hotels and restaurants - also saw output grow, supported by the football World Cup. That said, growth in this and other sectors was often mild, the bank cautioned.

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December’s data presented “positive signs of business’ inflationary pressures easing”, which in turn could feed through to a slowdown in the increase in prices charged to consumers, according to the report. Eleven of 14 sectors last month reported slower input cost inflation month-on-month - the highest number since last July. The chemicals sector posted the largest reduction in cost inflation, while there were also significant declines for automobiles and auto parts manufacturing, and food and drink manufacturing.

The tracker showed overall energy, material and logistics cost pressures weakening to 11, 20 and 25-month lows, respectively. By contrast, salary pressures remained close to record-high levels amid continued competition for workers.

Jeavon Lolay, head of economics and market insight at Lloyds Bank Corporate and Institutional Banking, said: “While the economy held up better than expected in recent months, the impact of temporary boosts such as the World Cup and first Covid-19 restriction-free Christmas for three years is evident. The mixed performance across UK sectors is likely to remain a rolling theme in 2023 as the strains from rising prices and higher interest rates impact both households and firms disproportionately.

“Still, further evidence of a broad softening of inflationary headwinds is welcome, as in large part this reflects the continuing normalisation of supply chain conditions for many sectors. How quickly this is reflected in firms’ output prices and then consumer prices will be watched closely. The other key dynamic to note in our report is the continuing strength of salary demands, which, if sustained, will keep underlying price pressures elevated.”

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Scott Barton, managing director, Lloyds Bank Corporate and Institutional Banking, added: “Despite December data showing a marginal increase in activity in some sectors, this month’s broader data illustrates that the current trading environment remains fragile. As companies begin their operations in 2023, it will be important to stay focused on the fundamentals. Through consistent and comprehensive forecasting, analysing performance data, and closely managing supply chains and inventory, businesses can establish a strong foundation to successfully navigate the challenges that lie ahead.”

The tracker includes indices compiled from responses to S&P Global's UK manufacturing and services PMI survey panels, covering some 1,300 private sector businesses.

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