South West business activity declines for first time since January
The headline NatWest South West PMI Business Activity Index – a seasonally adjusted index that measures the month-on-month change in the combined output of the region’s manufacturing and service sectors – dropped in May to signal a renewed fall in business activity. Though only slight, it marked the first reduction in private sector activity across the South West since January, and contrasted with a solid expansion of output across the UK as a whole.
The fresh fall in activity was linked to weaker demand conditions, with new business also contracting for the first time in five months. Inflationary pressures meanwhile eased, with both input costs and selling prices rising at the weakest rates in over two years. Encouragingly, optimism around the 12-month outlook for output strengthened, which supported a solid rise in employment.
After rising in each of the previous four months, the amount of new business placed with private sector firms in the South West declined during June. Though modest, the reduction contrasted with a mild expansion in new orders across the UK as a whole. Firms that registered lower sales often linked this to squeezed client budgets due to the rising cost of living and tighter financial conditions. There were also reports of customers adopting more cautious inventory policies due to economic uncertainty.
Although companies reported weaker output and new order trends in June, optimism around the year-ahead improved to its highest for three months. Firms anticipated that forecasts of stronger economic conditions, planned company expansions and new project starts could support growth of output over the next 12 months. That said, the overall degree of positive sentiment remained below the national average, with some firms expressing concerns over the impact of higher interest rates on client spending.
READ MORE: British Business Bank launches £200 million fund to support South West's small businesses
The seasonally adjusted Employment Index posted above the neutral 50.0 threshold in June, signalling a third consecutive monthly rise in staff numbers at private sector firms in the South West. The rate of payroll expansion picked up to a solid pace that was the second-quickest since July 2022. The pace of job creation also remained quicker than the UK-wide trend. Anecdotal evidence indicated that companies added to their workforce numbers to increase capacity, often in anticipation of firmer demand conditions in the months ahead.
The sustained upturn in staffing levels helped to improve capacity and enabled South West private sector firms to reduce their level of outstanding business for the fourth month in a row in June. There were also reports that lower intakes of new work had meant that companies could process and complete orders in a more timely manner. Notably, the rate of backlog depletion was the sharpest seen since September 2022 and exceeded that seen at the national level.
June data pointed to a further sharp rise in operating expenses faced by South West private sector firms. Where greater cost burdens were reported, companies often mentioned increased staff wages and utility payments. However, the overall rate of inflation edged down to a 28-month low.
Average input costs also rose at a weaker pace across the UK as a whole, and one that was slightly softer than that seen in the South West.
Adjusted for seasonal factors, the Prices Charged Index indicated an increase in average selling prices set by private sector companies in the South West during June. Charges have risen continuously on a monthly basis since January 2021. The pace of inflation was the softest recorded in over two years, but still sharp by historical standards. Where higher output prices were recorded, these were widely linked to the pass through of higher input costs to clients and efforts to reduce strain on operating margins.
