The South West private sector experienced a decline in business activity for the first time since January, according to the latest NatWest PMI report. The report, which measures the month-on-month change in the combined output of the region’s manufacturing and service sectors, showed that the South West PMI Business Activity Index fell below the 50.0 no-change mark to 49.8 in November, indicating a fractional contraction of output. This was in contrast to a solid expansion of output across the UK as a whole, which recorded a PMI of 54.5.
Weak demand and rising costs weigh on business performance
The main reason for the fall in business activity in the South West was a drop in new orders placed with firms in the region, which decreased for the second month in a row and at the fastest pace since June. Survey respondents attributed the decline in demand to the impact of the cost of living crisis, higher interest rates, and economic uncertainty on customer spending. Some firms also reported that supply chain disruptions and staff shortages had hampered their ability to fulfil orders and meet customer expectations.
The challenging business conditions also led to a rise in operating expenses faced by South West firms, which increased at the sharpest rate since July. The main drivers of cost inflation were higher staff wages, utility bills, and raw material prices. To protect their profit margins, firms raised their output prices at the fastest pace since August, but this also dampened customer demand further.
Employment and confidence show resilience amid downturn
Despite the deterioration in output and new orders, South West firms continued to increase their workforce numbers in November, extending the current sequence of job creation to 11 months. The rate of employment growth was modest but faster than the UK average, as some firms hired additional staff to cope with existing workloads and planned expansions. However, others reported that they had reduced their headcounts due to cost-cutting measures and voluntary staff departures.
Another positive sign for the South West economy was the improvement in business confidence regarding the outlook for output over the next 12 months. The degree of optimism rose to a four-month high, as firms anticipated that the easing of pandemic-related restrictions, the launch of new products and services, and the recovery of domestic and foreign markets would support growth in the coming year. However, the overall level of sentiment remained below the historical average and the UK-wide trend, as some firms expressed concerns over the potential impact of further interest rate hikes, Brexit-related issues, and environmental challenges on their business performance.
Regional comparison and commentary
The South West was one of four UK regions to record a contraction of business activity in November, along with the East Midlands, the North East, and Wales. The strongest expansion of output was registered in Northern Ireland, followed by London and Scotland. The UK regional average PMI was 54.5, down from 55.8 in October.
Paul Edwards, chair of NatWest South West regional board, commented: “The South West economy suffered a setback in November, as business activity fell for the first time in 10 months amid a drop in demand and rising costs. The cost of living crisis, higher borrowing costs, and economic uncertainty weighed on customer spending, while supply chain issues and staff shortages also posed challenges for firms. On a more positive note, employment and confidence showed resilience, as firms continued to hire staff and expressed optimism about the future. However, until there is a sustained improvement in demand conditions and an easing of cost pressures, the recovery of the region’s private sector is likely to remain fragile.”
