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Rising energy costs slow UK recovery

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Shoppers, some wearing face coverings to combat the spread of the coronavirus walk along Oxford Street in central London on December 10, 2021. - The UK government will from Monday tighten virus restrictions in England as Omicron variant cases surge, including guidance to work from home and mandatory Covid passports. The news dealt a bitter blow to pubs, restaurants and nightclubs, just as they had begun to recover from lockdowns that ravaged demand. (Photo by Niklas HALLE'N / AFP) (Photo by NIKLAS HALLE'N/AFP via Getty Images)
Rising energy prices were an increasingly significant driver of cost inflation in November. Photo: Getty Images

Embargoed Until 00:01am Tuesday 14th December

The pace of UK's economic recovery slowed in November partly as a result of an increase in energy costs pushing up cost inflation.

Ten out of of 14 UK sectors monitored by Lloyds Bank (LLOY.L) UK Recovery Tracker posted output growth, two fewer than in October. Just four sectors saw output growth accelerate month-on-month.

Rising energy prices were an increasingly significant driver of cost inflation. In November, the number of UK businesses that said they experienced higher energy bills and fuel prices was 3.8 times higher than the pre-2021 average. This compares to 3.5 times the pre-2021 average in October.

“Business leaders have been working hard to capitalise on higher demand, while facing the headwind of cost inflation,” said Scott Barton, managing director, corporate and institutional Coverage, Lloyds Bank Commercial Banking.

“With uncertainty around the spread of the Omicron variant, businesses now need to respond to ‘plan B’ impacts in England and restrictions in the UK as well as overseas," he said.

“Smart businesses will be ensuring their working capital position can support further pressures in costs or allows them to secure supplies in advance of their needs to ensure no interruptions.”

Deutsche Bank (DBK.DE) said in a note: "After October inflation surprised to the upside, we expect more in November. Black Friday sales should add to further volatility, particularly given low retail stock and supply chain disruptions impacting seasonal sales."

Read more: Why the UK is facing an energy crisis

Meanwhile, staff retention challenges continued to drive up salary costs, particularly within the UK’s service sector as businesses competed to attract talent amid ongoing worker shortages.

Only four sectors – Software & Services (61.5), Transportation (60.2), Chemicals (57.7) and Industrial Services (55.2) – posted faster month-on-month output expansion, two fewer than in October.

A reading above 50 signals output is rising, while a reading below 50 indicates contraction. The survey was taken before the emergence of the new Omicron variant.

Technology equipment firms – which includes producers of specialist parts in smart devices, motor vehicles, computers and industrial machinery – saw the most widespread input cost rises of any sector as businesses continued to face supply shortages of key input components and higher shipping costs.

The sector posted a reading of 99.7 on the Tracker’s UK Input Prices Index, up from 97.0 in October and a 2021 low of 68.9 in January,

Industrial Goods (91.5) and Chemicals (90.6) businesses saw the second and third highest prevalence of input price rises, while the Tourism & Recreation sector (90.5) saw the most widespread price rises of any service sector category.

"Cost pressures are rising at a record pace and across all the sectors we monitor," said Jeavon Lolay, head of economics and market insight, Lloyds Bank Commercial Banking.

“What is particularly notable is that many UK businesses, facing rising input costs, are potentially choosing not to fully pass them on to their customers. How sustainable this will be remains to be seen. Ultimately, persistent or worsening price pressures could leave some with no choice but to eventually raise prices.

Watch: What is inflation and why is it important?