24 January 2023 – Despite inflationary pressures improving, new data shows that consumer demand has decreased again in December.
According to Lloyds Bank‘s UK Sector Tracker for December 2022, consumer demand, which is measured by the number of new orders, continued to decrease in the last month of 2022. However, it’s the slowest contraction since September 2022.
Lloyds Bank suggests that the reason for this weakening is down to inflation still being high. Even though pressure from inflation has started to ease, households budgets are not yet feeling it.
But if inflation continues to slow down, consumer prices could also start to grow at a slower rate than we have seen in the past year.
Pressures Caused By Inflation Are Getting Better
From the fourteen sectors the Tracker has looked at, eleven have reported that the monthly input cost inflation has slowed, which is the highest number since July 2022.
This shows that the rate of inflation slows down, which will ease the pressure on input cost for many businesses.
The biggest decrease in cost inflation has been reported by the chemicals sector, with a reduction of 9.6 points compared to the previous month. The automobile and auto parts manufacturing sectors have also seen a sharp decline in cost inflation, down by 6.9 points.
A similar decline, 6.8 points, has been reported by the food and drink manufacturing sector. The data from the Tracker has also shown that there was an overall decline in cost pressures for energy, material and logistics.
This data promises an improvement in the inflationary pressures in the months ahead, which will be welcomed by many small companies.
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.
Jeavon Lolay, Head of Economics and Market Insight at Lloyds Bank
However, it’s not all good news. Salary pressures continue to weigh heavy on businesses, with 3.87 times the long-term average, which is close to record-high levels. This shows that competition for workers is still a problem and many businesses have to increase the salary they offer to get the staff they need.
UK Economy Still Contracting Despite Output Growth In December
More than twice as many sectors have reported output growth in December 2022, compared to November, Lloyds Bank’s data suggests.
In December seven of the fourteen sectors have reported output growth, which is the highest number since June 2022. In comparison, in November only three sectors did.
The largest rise in output growth was reported by software services firms, which has risen from 47.5 points in November to 56.8 points in December. Anything above 50.0 points is seen as an expansion, while anything below that is a contraction.
The automotive manufacturing sector follows with a similar rise, from 38.0 points in November to 53.1 points in December.
A combination of the World Cup and the first restriction-free Christmas in two years has also led to an output growth in the tourism and recreation sector, with 50.2 points in December, up from 44.6 points in November. This sector includes pubs, hotels and restaurants.
However, overall the UK economy has shrunk in December, with 49.0 points in December compared to 48.2 points in November, despite some sectors seeing growth.
UK Recession Forecast To Be Worse Than Expected
The business consultancy EY has revised their forecast for a UK recession and now says it could be twice as deep as originally thought.
Back in October, the consultancy firm predicted a 0.3% decline in gross domestic product (GDP) in 2023. Then in 2024 they forecast a 2.4% growth and a rise in GDP by 2.3% in 2025.
But the firm has now downgraded their forecast, because government support will be reduced from April, taxes have increased and overall the economic outlook is worse than a few months ago.
EY analysts now think that GDP will shrink by 0.7%, then grow by 1.9% in 2024 and 2.2% in 2025.
The UK’s economic outlook has become gloomier than forecast in the autumn, and the UK may already be in what has been one of the mostly widely anticipated recessions in living memory.
Hywel Ball, UK Chair of EY
Whether the UK is already in a recession or not is not clear. A recession occurs when an economy is shrinking in two consecutive quarters.
While the UK economy has contracted in the third quarter in 2022, in November it has grown slightly by 0.1%. This could lead to the final quarter of that year being positive.
But EY says that the UK will go into a recession this year, with the economy shrinking in the first six months of 2023. And while the consultancy firm expects this recession to be deeper than initially thought, it won’t necessarily be longer.
