Business outlook strongest in six months amid hopes inflation has peaked

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Every business sector monitored by the Bank of Scotland tracker report is expecting output to grow over the next year amid hopes that inflation has peaked.

According to the latest 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 ten-month low. For the first time in six months, all 14 sectors monitored by the UK-wide tracker expect their output to grow over the next year, up from 13 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. A reading above 50 indicates an expected increase in output over the next 12 months, while a reading below 50 points towards an expected decline.

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The more positive outlook came as the tracker recorded a sixth consecutive month of declining output across the UK economy (48.5 in January versus 49 in December) – the longest continuous period of contraction since the 2008/09 financial crisis.

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.”

Positively, the rate of input cost inflation across both manufacturing and services slowed, with the lowest monthly increase since May 2021, supported by weaker energy cost pressures.

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