Firms facing 'significant period of uncertainty' after more sectors see demand slump

Businesses are facing a “significant period of uncertainty” after the number of sectors reporting falls in demand increased for a fourth successive month in August.

Of the 14 sectors monitored by the Bank of Scotland UK Sector Tracker, 11 saw demand, as represented by new orders, fall. That is one more than in July and the highest number since June 2020, at the height of the first Covid lockdown.

Tourism and recreation, which includes the likes of pubs, hotels, restaurants and leisure facilities, suffered the fastest fall in demand, as consumers continued to rein in discretionary spending.

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Each of the sectors which saw new orders contract also saw output decrease (11 out of 14 sectors in August versus nine in July).

Jeavon Lolay, head of economics and market insight at Lloyds Bank Corporate and Institutional Banking.

Technology equipment manufacturers (58.1 on the August tracker’s measure of demand versus 52.4 in July), providers of software services (58 versus 57.8) and metals and mining firms (51 compared with 34.3) were the only sectors to see both demand and output grow.

Elsewhere, the tracker showed that slower rises in material and logistics costs helped bring overall input cost inflation (76.6 versus 78.4 in July) down to its slowest pace since September 2021. However, reports of energy and salary cost inflation remained close to record highs, Bank of Scotland noted.

In addition, supply constraints continued to ease last month with companies reporting supplier shipping delays falling to their lowest level since October 2020. Manufacturing firms reported that input shortages dropped to their lowest level since November 2020, providing some relief to businesses.

The tracker, overseen by Bank of Scotland parent Lloyds Banking Group, includes indices compiled from responses to S&P Global’s UK manufacturing, services and construction PMI survey panels, covering more than 1,500 private sector businesses.

Scott Barton, managing director, Lloyds Bank Corporate and Institutional Banking, said: “The cost of doing business remains extremely high, and firms continue to face into a significant period of uncertainty.

“Reduced supply chain pressures is positive news for businesses, helping to alleviate one of the challenges they face and should allow them to free up some working capital that they may have otherwise tied up in stock.

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“This should allow businesses to benefit more from the flexibility and agility to react to whatever lies ahead. Healthy cashflow and strong working capital management will be key.”

Jeavon Lolay, head of economics and market insight at Lloyds Bank Corporate and Institutional Banking, added: “Our tracker shows that the slowdown in activity spread to more sectors of the UK economy in August. More tellingly, all 11 sectors that saw output fall last month also saw demand falter.

“While the government’s energy support package represents a crucial intervention for households and businesses, it is too early to tell whether this will turn the overall trend of the economy. However, it should have a marked impact on UK inflation, with the likely peak later this year now estimated to be closer to the current rate of 10 per cent, rather than the much higher double-digit rates anticipated for next year.”

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