10 of the 14 total sectors monitored by the Bank of Scotland’s UK Sector Tracker last month reported output growth. This was two more than in January (8), the most since April 2023 (10), and pointed to a broadening expansion of growth across the UK economy.

In particular, software services—which includes software consulting and data processing firms—saw output grow at the sharpest rate of any monitored sector in February (57.5). The sector was closely followed by financial services (57.4), which includes banks, insurers, and investment services firms.

However, another tech-related sector was among those who had the fastest rates of contraction: the technology equipment manufacturing sector (43.2).

A reading on the tracker above 50.0 indicates expansion, while a read below this number stipulates contraction.

What led to output growth?
Output growth in the tracked service sectors was driven by growing demand, Bank of Scotland, which is part of the Lloyds Banking Group, said. In February, the tracker’s index for service sector demand climbed to 53.5 — its highest level since May 2023.

However, in manufacturing, new orders fell for the 11th month in a row (45.4). Tracker data suggests that manufacturing output growth was instead driven by firms running down backlogs of unfinished work, while businesses also indicated they were proactively increasing production in response to an improvement in underlying conditions.

In February, the new balance of manufacturers that expect their output to be higher in 12 months’ time rose to the highest level since August 2023, as firms reported reduced recession concerns.

Global supply chain disruptions
Alongside broadening output growth, February data provided further indications that global supply chain disruption, along with wage pressures, were potentially starting to increase costs for UK businesses.

In February, the tracker’s index of input price inflation rose to its highest level in six months. This came as more manufacturers reported shipping delays than at any time since 2022, while the number of businesses reporting rising shipping costs climbed to a 15-month high.

As a result, the rate at which prices charged to customers rose also increased marginally in February, albeit less sharply than input costs, suggesting that businesses were not passing the full extent of cost increases onto their clients.

Although the tracker’s measure of wage cost pressures dropped to a four-month low in February, wages continued to be cited as a key cost driver.

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Expert perspectives
Speaking on the findings, Nikesh Sawjani, senior UK economist at Lloyds Bank, commented: “Growth is continuing to spread to more and more parts of the UK economy as conditions improve.

“This positive momentum, alongside last week’s GDP data showing the UK economy expanded in January, provides more evidence that early 2024 is less likely to experience the pattern of economic contraction seen in the second half of last year.”

Scott Barton, managing director of Lloyds Bank Corporate & Institutional Banking, also added: “It’s encouraging that we are seeing activity increase across more parts of the UK economy. Moreover, a further rise in output expectations across most sectors suggests these trends have further to go.

“However, the data also shows that the impact of renewed supply chain disruptions is a headwind that firms will need to carefully navigate.

“Similarly, if firms are ramping-up production in anticipation of future demand, it’s critical that they consider how they can build the inventory they need and where to invest in their businesses while still protecting their working capital.

“Getting this balance right will mean they can continue to be financially agile and able to mitigate against any sudden movements in the economy or external environment.”