North West region badly affected by Brexit jitters

The latest NatWest PMI report showed a contraction in business activity in the North West of England during August.

Softer demand conditions led firms to reduce output and slow employment growth, while expectations for future activity also weakened.

The headline NatWest North West Business Activity Index – a seasonally-adjusted index that measures the change in the combined output of the region’s manufacturing and service sectors – fell from 50.2 in July to 47.1 in August, indicating the first decline in business activity in the region since the brief shock to output in the immediate aftermath of the EU Referendum.

The downturn was solid and contrasted with a marginal upturn across the UK as a whole.

Falling manufacturing output led the decline in the North West’s performance during August, which respondents often linked to lower order volumes.

Overall new business was also down in August, the fourth monthly deterioration in a row and the most marked for more than three years.

Companies associated this with old contracts ending and clients remaining cautious over additional spending. Again, the decline was centred on the manufacturing sector.

Out of all 12 monitored areas, the North West saw the second-strongest fall in sales – weaker only than Northern Ireland – while the UK on average recorded a slight drop in demand.

The quicker fall in new business allowed firms to reduce work-in-hand for the 10th consecutive month, with the latest drop being the sharpest since January 2016.

Employment growth, meanwhile, eased to a 16-month low, as job losses were extended in the goods-producing sector.

Notably, though, the service sector reported a strengthening in the rate of job creation.

August saw input price inflation tick up to the highest since April. According to respondents, a weakening exchange rate with the US dollar was a key factor inflating cost pressures, with some also noting higher raw material prices.

North West businesses, thus, raised their charges again over the month, although the increase was modest and below the UK-wide average.

Expectations for future activity deteriorated during August, broadly reversing the gain recorded in July.

Firms were generally positive when giving output forecasts, with planned product development and hiring activity supporting their projections.

However, uncertainty surrounding Brexit continued to subdue the overall outlook.

Richard Topliss, chair, NatWest North regional board, said: “Despite being the fourth consecutive drop in demand across the North West of England, August’s decline was the first definitively felt by businesses, who reported a solid reduction in output.

“Job numbers increased, but only slightly, while expectations for future activity signalled a relatively subdued outlook for the region.

“While some panelists attributed the demand weakness to customer caution amid ongoing Brexit uncertainty, the downturn was in substantive contrast to a fractional drop in new business across the UK as a whole, suggesting that the local economy is struggling more than the national one at the moment.”

Nick Stamenkovic, senior economist, NatWest said: “Certainly the results of this latest PMI suggest that Brexit is affecting North West and UK businesses.

“The pound has enjoyed its best rally in 10 months this week, but uncertainty is still likely to continue to hold back investment and behaviours in the short term.

“Until a deal is agreed and the outlook is more certain, some companies will continue to divert future investment to no-deal preparations.”

Accountancy firm KPMG believes a no deal exit will trigger a recession.

According to KPMG’s latest Economic Outlook an orderly departure from the European Union on 31 October would see GDP growth reaching 1.5% in 2020 but a no-deal Brexit could prompt a four-quarter recession, with GDP shrinking by 1.5% next year.

The report finds that trade disruption under a no-deal outcome would damage businesses across the region, with investment and cross-border transactions likely to be threatened.

Alongside its Economic Outlook, the advisory firm’s latest Report on Jobs in the North alongside REC (Recruitment & Employment Confederation) revealed the first decline in permanent placements for six months, with workers reluctant to move amid the current climate.

Yael Selfin, Chief Economist at KPMG UK, commented: “With the Brexit debate poised on a knife-edge, the UK economy is now at a crossroads. It is difficult to think of another time when the UK has been on the verge of two economic outcomes that are so different, but the impact of a no-deal Brexit should not be underestimated.

“Despite headwinds such as the slowing global economy and limited domestic capacity, the UK economy now has the potential to strengthen over the next 12 months. But a no-deal Brexit could put paid to this upside, triggering the UK’s first recession for a decade.”

Nicola Quayle, Office Senior Partner at KPMG in Manchester, said: “Reports from the frontline of the North’s jobs market show that employer confidence is waning under the pressure of mounting economic and political uncertainty. This has made temporary hires more attractive compared to permanent roles in plugging more immediate resourcing needs.

“That said, the labour equation is further complicated as workers question whether they want to risk changing roles in the current climate – again shrinking the pool of available talent. Northern businesses and employees are looking for a Brexit breakthrough to restore market confidence and some visibility.”

BDO’s Services Optimism Index collapsed 3.89 points in August to 95.49, only just above the 95 level that indicates recessionary conditions.

This drop in confidence has dragged the overall Optimism Index down by 3.21 points across the month.

The index provides information on future economic developments based on opinion surveys of more than 4,000 respondents to constituent surveys and is a good indicator of economic growth in the sector six months ahead.

History shows that when confidence falls, it can drive businesses to invest less and hire fewer people, in turn creating the conditions for a recession.

This negativity was reflected throughout BDO’s Business Trends report.

BDO’s Employment Index fell by 0.26 points in August.

Ed Dwan

Though this has been the most buoyant economic indicator in recent years, reflecting the UK’s extraordinary ability to create jobs through this economic cycle, the index has now been in decline for eight consecutive months.

Elsewhere, BDO’s Output Index also fell by 0.37 points, marking the third month of decline for output.

Ed Dwan, partner at BDO and head in the North West, said: “This month’s dramatic fall in confidence is a very worrying event.

“Pessimistic companies don’t invest or hire, which is how recessions start. The reason for this has to be that UK businesses have suddenly woken up to the fact that a no deal Brexit is a real possibility.

“This reminds me very much of the aftermath of the 2010 election, when there was a sudden realisation that austerity wasn’t going to be pretty. Sentiment collapsed as a result, and this was the precursor to a long period of very low growth that followed.

“Let’s hope that we can avoid a no deal Brexit, otherwise the next couple of years could be very uncomfortable.”