Business activity growth remains solid, but costs rise at record rate

Firms in the North West recorded a sustained recovery in business activity in October while also increasing employment at a record pace as they looked to meet demand, latest Regional PMI data from NatWest showed.

Less positively, however, local businesses faced an unprecedented rise in costs, owing in part to surging wages and energy prices.

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 – registered 55.3 in October, up from 54.9 in September.

Moving further above the 50.0 no-change mark, the index signalled a solid and accelerated rate of growth, albeit one that was slower than the UK average of 57.8.

Inflows of new business at firms in the North West regained momentum at the start of the fourth quarter. The rate of growth was sharp and the quickest seen for three months, although it remained well below the highs seen during the summer.

The upturn – which slightly exceeded the national average – was driven by the service sector, with local manufacturers observing a subdued trend in new orders.

Latest data showed a further loss of confidence among firms in the North West towards growth prospects in the year ahead.

After reaching a record high in May, expectations have now fallen in four of the past five months to the lowest since January.

Only firms in the North East, Scotland and Northern Ireland are less upbeat about the outlook. A number of firms predicted that activity levels would normalise in the coming months after a post-lockdown surge.

The recovery in workforce numbers across the North West continued in October. Furthermore, there was a notable acceleration in the rate of job creation to quickest in the series history stretching back to 1997. Firms commented on efforts to increase staffing capacity in line with growing demand, with some noting the lifting of recruitment freezes. The rise in employment was broad-based by sector.

Latest data pointed to a sustained build up of outstanding business at firms in the North West, thereby extending the current sequence of accumulation to seven months. The rate of growth was solid and broadly in line with that recorded in the previous survey period.

Where an increase in backlogs was recorded, firms highlighted the influence of raw material shortages and difficulties filling vacancies.

Cost pressures faced by firms in the North West continued to intensify in October. The rate of input price inflation accelerated for the third month in a row to a fresh record high. The cost of energy, labour, transportation and raw materials all increased, according to reports from surveyed businesses.

Underlying data indicated that the manufacturing sector continued to be hit hardest by rising operating expenses.

October saw many businesses in the North West raise their output prices as they looked to pass on the burden of higher costs to customers. Although easing from the previous survey period, the rate of inflation remained among the fastest seen in the series history and quicker than the average across the UK as a whole.

Richard Topliss, chairman of NatWest North regional board, said: “There were a number of key takeaways from October’s survey results, but unfortunately, not all of them were welcome.

“Starting with the positives, we saw business activity levels across the North West continuing to recover at a solid rate, making nine consecutive months of growth.

“And reflecting increasing efforts to expand capacity in line with demand, firms in the region ramped up the rate of job creation to the quickest on record.

“However, the tightness in the labour market is adding to inflationary pressures from rising raw material, transportation and energy costs, resulting in an unprecedented increase in business costs.

“Growth expectations have waned, which is partly to be expected as activity levels continue to normalise following the troughs and peaks over the past year-and-a-half, but the decline in optimism in the region has been stark.”