BUSINESS activity in the south west has fallen for the first time in 18 months, according to a seasonally adjusted index that measures change in the manufacturing and service sector's output. 

The headline NatWest South West PMI Business Activity Index rated activity at 46.2 in August, down from 51.3 in July and below the crucial 50.0 no-change threshold.

The index reading signalled the first drop in business activity across the region for a year-and-a-half and one that was solid overall.

A renewed fall in output was also seen at the national level, though the rate of decline was only marginal.

Private sector firms operating in the south west signalled a second successive monthly reduction in overall new work during August.

Companies that registered lower sales often linked this to uncertainty around the economic outlook and subsequent cuts to client spending.

The rate of decline was the quickest since January 2021 and solid. This contrasted with only a fractional drop in new business across the UK as a whole.

The Future Activity Index indicated that south west private sector firms were generally upbeat about the 12-month outlook for output in August.

That said, the degree of positive sentiment slipped for the fourth month in a row and was the lowest seen since the series began ten years ago. Optimism also remained notably weaker than the UK-wide trend.

While ongoing company expansion plans, increased investment and forecasts of rising customer demand were expected to support growth over the coming year, there were concerns that an economic slowdown and rising costs could dampen prospects.

Adjusted for seasonal variation, the employment index pointed to a notable slowdown in the rate of job creation across the south west private sector in August. Furthermore, employment rose at a marginal pace that was the weakest seen since the current period of expansion began 18 months ago.

While some firms took on extra workers to help expand capacity, others mentioned difficulties replacing voluntary leavers and efforts to contain costs. Of the 12 monitored UK regions, only the north east registered a weaker performance in August, with a decline in headcounts.

Latest survey data signalled a sharp and accelerated fall in outstanding business at south west private sector firms in August.

Notably, the rate of backlog depletion was the quickest recorded since June 2020 and the second-steepest of all 12 UK regions (after the north east). Companies that registered lower amounts of unfinished work often attributed this to weaker inflows of new orders.

Average operating expenses faced by private sector companies in the south west rose for the 27th month running in August. Though rapid overall, the rate of inflation edged down to a 15-month low and was not quite as sharp as that seen at the national level. Higher costs for fuel, energy, wages and raw materials were all cited by panellists in the latest survey period.

As has been the case since January 2021, south west private sector companies increased their output charges in August. The rate of inflation edged down to a six-month low, but was nevertheless among the quickest seen in the series history.

Andover Advertiser: South West PMI Business Activity Index.

Reports from panel members frequently mentioned partly passing on additional cost burdens to clients in the form of higher selling prices. Output charges also rose sharply across the UK as a whole, with the pace of inflation quicker than that seen in the south west.

Key Findings:

  • Output falls solidly amid steeper reduction in new orders
  • Employment expands at slowest rate for a year-and-a-half
  • Inflationary pressures cool, but remain marked overall

Paul Edwards, chair, NatWest South West Regional Board, said: “South west private sector firms registered a renewed fall in business activity during August as sales dropped for the second month in a row. Firms often blamed the weaker business environment on sharply rising costs and fears that the economy is sliding into a recession, which has led clients to cut back on spending.

"As a result, employment growth near-stalled in August amid signs of spare capacity, while confidence around the outlook fell to its lowest on record. Underlying inflationary pressure reduced in August, but with energy prices continuing to rise this is a continued and growing source of concern for most businesses and the reason why we are working to support them through this difficult time.”