UK Healthcare firms under pricing pressures

The number of UK sectors reporting output growth hit a three-month high in October, as businesses experienced intense pressure to raise prices, according to the latest Lloyds Bank UK Recovery Tracker.

Twelve out of 14 sectors reported output growth in October, up from 10 in September, and the highest number since July. 10 out of 14 sectors posted a faster month-on-month rate of expansion, up from nine in September, with consumer-facing services businesses experiencing the sharpest rise in activity.

Tourism and recreation (with an output reading of 70) – which includes pubs, hotels, restaurants and leisure facilities – was the fastest growing UK sector monitored by the Tracker for the second month in a row. The sector was boosted by the relaxation in international travel rules and more tourists visiting the UK. A reading above 50 signals output is rising, while a reading below 50 indicates contraction.

The UK real estate (57.5) sector posted its strongest performance since August 2020 due to a resurgence of housing market activity, while the transport (56.4) sector benefitted from an increase in domestic and international travel and higher demand for haulage services.

Pricing pressures intensify

All 14 sectors monitored by the Tracker increased their prices in October, with 11 sectors increasing what they charged customers by a greater extent than in September. The biggest price rises were by firms in the chemicals, metals and mining and industrial goods manufacturing sectors.

Price increases reflected the sharpest monthly rise in input cost inflation since October 2016. Out of the 13 countries monitored by the Tracker, businesses in the UK faced the highest rise in input costs. Firms said the most significant drivers of the increase were rising energy prices, particularly for natural gas and oil, and the need to offer higher salaries to recruit staff in a competitive labour market.

The number of UK businesses that said energy costs added to their operating expenses rose to 3.5 times the long-run average in October and was the highest since August 2008. Meanwhile the number of firms that said salary pressures affected their bottom line was a record high of 3.4 times the average recorded by the Tracker.

The sectors that faced high levels of input cost inflation and comparatively lower levels of output price inflation were technology equipment manufacturing, healthcare and tourism and recreation. Firms in these sectors had their margins squeezed by the greatest extent in October and are potentially under the most pressure to raise their prices if conditions fail to improve in the months to come.

Businesses also experienced intense supply chain pressure in October, with the length of delivery times rising at the sharpest pace since August. Technology equipment and food and drink manufacturers felt the greatest pressure. Compared to the peak of the pandemic in April 2020, four of the seven manufacturing sectors monitored by the Tracker recorded worse supply chain delays in October.

Jeavon Lolay, Head of Economics and Market Insight, Lloyds Bank Commercial Banking, said: “After a brief summer slowdown, the UK recovery regained some momentum at the start of the fourth quarter. However, while encouraging, the headwinds from supply chain disruption and brisk input price inflation are proving both more persistent and stronger. Many firms are currently preoccupied managing continuing pressures on their capacity and bottom lines.

“It suggests that inflationary pressures are likely to continue to intensify in the coming months. This could further dent consumer confidence and restrain household spending, the mainstay of the recovery so far.”

Scott Barton, Managing Director, Corporate and Institutional Coverage, Lloyds Bank Commercial Banking, said: “October’s data reveal an improved economic picture for the UK, but the supply chain disruption and raw materials shortages that have dogged businesses for months are holding firm. They are now being compounded by rising energy prices and rising salary expectations.

“Many business leaders will be frustrated that they cannot take full advantage of recovering demand and will be concerned that fully passing on higher input prices could make their products and services less competitive. While the situation is currently very challenging, the broad expectation remains that this global cost shock will prove transitory and that supply chains will recover next year.”