Material and labour shortages restrict economic growth in North West

Private sector business activity in the North West continued to expand in September, but growth was constrained by supply bottlenecks and staff shortages, according to the latest Regional PMI data from NatWest.

The headline North West 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 – was at 54.9 in September, down from 55.3 in August, signalling growth for the eighth straight month but at the slowest rate since February.

Where companies reported greater activity, they linked this to improved demand conditions and an associated increase in new business.

September data pointed to a seventh successive monthly rise in new work intakes at North West companies.

The pace of expansion was solid but eased to the weakest in the aforementioned sequence. Where growth was reported, panel members mentioned improved demand from domestic and international clients. However, anecdotal evidence suggested that the upturn was restricted by shortages of labour and raw materials.

North West firms remained strongly confident that output would increase over the course of the coming 12 months, as the recovery from the pandemic was predicted to continue. Panellists expect to gain market shares, improve productivity, launch new products and services, and boost investment as demand conditions continue to strengthen.

The overall level of confidence was down only marginally from August, thereby remaining well above its long-run average.

Private sector employment in the North West rose further at the end of the third quarter, stretching the current sequence of expansion to seven months.

Despite easing from August, the pace of job creation remained marked by historical standards. According to survey participants, additional recruitment stemmed from capacity expansion efforts, the establishment of new units and anticipation of growth in 2022.

The upturn, however, was reportedly curbed by candidate shortages.

Although North West companies continued to see their backlogs of work increase in September, the pace of accumulation eased to the weakest in the current six month sequence of expansion. Those companies that reported higher levels of outstanding business cited robust inflows of new work, shortages of inputs and difficulties hiring additional staff.

Local firms recorded a slower increase in backlogs than that seen at the UK level.

September data pointed to a steep and accelerated increase in average cost burdens at North West firms. Moreover, the respective seasonally adjusted index climbed to a new series record.

Among the reasons cited for the latest upturn in expenses were shortages of materials and staff driving up input and labour costs. Panel members also blamed the latest rise on rising fuel and transportation costs.

For the second month in a row, cost inflation in the region outpaced the national average.

After easing in each of the prior two months, the rate of output charge inflation accelerated in September and approached the series record set in June. Companies that raised their charges commonly mentioned the pass-through of rising cost burdens to clients.

The North West was third in the regional rankings for charge inflation, behind Northern Ireland and Wales.

Richard Topliss, chairman of NatWest North regional board, said: “Business activity levels continued to recover at companies across the North West in September, but the PMI data indicated that the pace of growth softened further.

“It’s unsurprising to see growth slowing down after the initial reopening phase in the summer, but at the same time, businesses are telling us that supply bottlenecks and labour shortages are also holding back activity.

“These imbalances across supply chains and in labour markets are continuing to lead to price pressures, and we’re seeing this reflected in a record rate of input cost inflation in the North West.

“Still, local firms remain strongly optimistic about the outlook for activity in the coming year, and they endeavour to boost operating capacity by taking on more staff.”