Expectations of weaker inflation push up output growth forecasts across hospitality

Output expectations in tourism and recreation, which includes pubs, hotels and restaurants, grew from 47.7 recorded in December last year to 59.6 in January; the second largest month-on-month rise of any sector.

The UK Sector Tracker uses PMI data from S&P Global to shed light on current trends in the UK economy. A reading above 50 on the Tracker indicates expansion, while a reading below 50 indicates contraction.

For the first time in six months, all 14 sectors monitored by the Lloyds Bank UK Sector Tracker expect their output to grow over the next year, with the number of businesses citing that they expect inflationary pressures to weigh on output this year falling to a 10-month low. 

The UK metals and mining sector saw the largest month-on-month rise in output expectations (74.1 in January versus 58.6 in December), while transportation (54.2 versus 51.9 in December), and food and drink manufacturing (72.7 vs 70.0 in December) reported the lowest increases.

However, the more positive outlook came as the Tracker recorded a sixth consecutive month of declining output across the UK economy (48.5 in January vs. 49.0 in December) – the longest continuous period of contraction since the 2008 financial crisis.

Businesses suggested that strong wage pressures have prevented input cost inflation from falling more quickly. The number of survey respondents citing that operating expenses have risen due to increases in staff salaries was 2.3 times higher than the long-run average in January.

“Hopes that inflation has peaked underpinned a broad-based recovery in business confidence in January,” says Jeavon Lolay, head of economics and market insight at Lloyds Bank Corporate and Institutional Banking.

“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.”