Falling consumer confidence and slowing demand growth has started to weigh on output across the hospitality and tourism sectors, according to the first Lloyds Bank UK Sector Tracker.

The sector – which includes hotels and leisure facilities as well as pubs, bars and restaurants – posted its third consecutive month of output growth, with firms recording the second fastest rate of growth (65.0) of all 14 UK sectors monitored by the Tracker in April.

However, there were early indications that inflation has started to erode purchasing power and dampen consumer demand, threatening the outlook for the sector.

Using 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.

According to the data, the sector’s pace of output growth slowed month-on-month as firms reported a moderation in new business activity for the second month in a row (56.6 in April vs. 63.6 in March and 64.5 in February).

Record price rises amid surging cost inflation

Tourism and leisure firms reported an unprecedented rise in input costs in April, driven by higher transportation, material, energy and salary expenditure.

The sector registered 91.4 on the Tracker’s Input Price Index – the sharpest rate of cost inflation in 24 years of the Tracker’s underlying data.

Against this backdrop, nearly two-thirds (63%) of firms raised prices charged to customers, leading the sector to post a record 72.9 on the Tracker’s Prices Charged Index.

The gap between the Tracker’s Input Price and Prices Charged indices narrowed to 18.5 points (vs. 18.8 in March), suggesting that margin pressures eased slightly.

However, the difference remained more than twice the pre-pandemic average, underlining a continued squeeze on profitability.

“UK firms have continued to benefit from consumers, at home and overseas, looking to travel and embrace leisure activities again after so many months living under Covid-19 restrictions,” says Annabel Finlay, managing director and head of food, drink and leisure at Lloyds Bank Commercial Banking.

“However, there are early indications that consumer confidence is waning – a factor that could lead to more conservative spending, and future falls in demand. If inflationary pressures remain, many businesses face a dilemma.

“As this month’s data show, the sector is battling elevated cost inflation, with firms, understandably, adjusting the prices charged to customers to help rebuild margins. How much they can do so without further negatively impacting demand will be a key consideration going forward.

“Ultimately, future demand will depend on the degree to which consumers consider travel and leisure spending as core or discretionary. It’s possible that we will witness divergences in demand trends across the economy, as those who have accrued ‘excess’ savings continue to spend, while those with lower incomes exercise greater caution.

“Firms may need to be agile in response to potential changes in the spending behaviours of their customer bases.”