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UK tourism and leisure sector shrink as inflation hits demand

The UK's tourism industry contracted at the fastest pace since February 2021. Photo: Dominic Lipinski/PA
The UK's tourism industry contracted at the fastest pace since February 2021. Photo: Dominic Lipinski/PA (Dominic Lipinski - PA Images via Getty Images)

Britain's tourism and recreation sector experienced the sharpest decline of any industry in the UK in September, the latest Lloyds Bank UK Sector Tracker shows.

Output in the sector, which includes pubs, hotels, restaurants and leisure facilities, contracted at the fastest pace (36.3) since February last year, when the nation was last in lockdown.

The drop was caused by demand, represented by new orders, falling for the fourth month in a row to 38.5 as consumers cut discretionary spending amid rising inflation.

However, output grew across five of the 14 UK sectors last month, compared to three in August, while the same number saw new orders grow.

Output growth was highest among software service providers at 55.8 compared to 63.1 in August, followed by healthcare firms (53.6 versus 47.8).

A reading above 50.0 indicates expansion, and a number below that indicates a contraction.

In contrast, the metals and mining sector was closely behind tourism and recreation in posting rapid output contraction at 38.2 from 57.4 in August.

Services businesses across the UK economy reported weaker demand. However, providers software services providers were the only entirely service-based sector monitored to see new orders rise in September to 52.6 from 57.8 the month before.

Read more: UK inflation back to double-digits as price rises hit 10.1% in September

The figures come as price rises returned to double-digits last month as the increase in the cost of living jumped more than expected to a 40-year high.

UK inflation was running at 10.1% in September, the latest data from the Office for National Statistics (ONS) showed. That was up from 9.9% in August, and just above economists' forecasts of 10%.

Food and energy bills were the main drivers with the former soaring by 14.6% — the biggest leap in the cost of food on records from the ONS since 1989.

A record number of manufacturers report rising energy prices as a driver of input cost inflation. The Tracker showed that overall input cost inflation for businesses intensified last month for the first time since May (77.4 from 76.6 in August).

It said that rising energy prices for manufacturers, drove the increase, which surpassed a previous peak during the 2008 oil price shock.

Read more: Energy bills could hit £4,000 after Jeremy Hunt U-turns on support

But despite this, there have been signs of easing cost pressure on businesses, while cost inflation accelerated month-on-month, the Tracker showed an improvement in price pressures quarter-on-quarter.

The average pace of input cost inflation slowed in all 14 sectors monitored by the Tracker between the second and third quarter of 2022. The rate of inflation in prices charged to customers slowed in 12 sectors.

That was supported by easing wage and shipping cost pressures, it said, with reports of higher shipping costs reaching a 21-month low in September.

Jeavon Lolay, head of economics and market insight at Lloyds Bank, said: “Inflation returned to double digits, reaching 10.1% in September. While we expect UK inflation to remain stubbornly high in the coming months, there are clear signs of an easing in pipeline cost pressures in our latest UK Sector Tracker report.

"In the third quarter, output prices rose more slowly in twelve of the fourteen sectors we monitor, meanwhile input cost inflation moderated across all fourteen sectors compared to the previous quarter.

"That’s not to say that businesses won’t continue to face intense cost pressures, but suggests that peak inflation is near. This will be welcome news for both businesses and consumers.

"However, the recent news that the energy price guarantee scheme from April will prioritise support for the most vulnerable means that what happens to wholesale energy prices will, again, have a significant bearing on UK inflation from then on. The Bank of England will need to assess carefully prospects for both inflation and growth as it considers just how much more tightening is needed."

Watch: How does inflation affect interest rates?