Inflation and economic uncertainty lead to slowdown in North West business activity

The latest Regional PMI data from NatWest published today (June 13) showed a slowdown in the rate of business activity growth across the North West in May.

This reflects a loss of momentum in the post-lockdown recovery and headwinds to demand from rising prices and economic uncertainty.

Firms reported a sharp increase in charges for goods and services as they continued to grapple with rising costs, although a rise in employment was indicative of relatively resilient business confidence in the region.

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 53.0 in May. Although still above the 50.0 no-change threshold, the latest reading was down from April’s 58.7 and signalled the slowest growth for four months.

May saw a further increase in new business across the North West private sector, driven by a sustained rebound in demand for services following the lifting of COVID-related restrictions. However, owing to a combination strong price pressures and weakness in manufacturing new orders, the rate of growth eased for the third month running to the weakest since January.

After falling to a four-month low in April, firms’ expectations towards future activity showed a slight rebound midway through the second quarter. The improvement in confidence among businesses in the North West contrasted with a decline across the UK as a whole.

Furthermore, the degree of optimism in the region was second only to that recorded in Yorkshire & Humber. Surveyed firms reported hopes of a sustained post-pandemic recovery in demand, alongside greater business investment and a boost to activity from increased staffing capacity.

Business costs continued to intensify midway through the second quarter, with the rate of input price inflation accelerating to a new record high.

The increase in costs, which was slightly steeper than the UK average, was attributed by surveyed firms to rises in the price of energy, food, fuel, raw materials and shipping. Pay pressures were also a contributing factor, anecdotal evidence showed.

With firms continuing to pass on at least part of the burden of higher costs to clients, May saw a further sharp rise in average prices charged for goods and services. The rate of output price inflation ticked down only slightly from April’s record high and continued to outstrip the average recorded across the UK as a whole. Underlying data showed a particularly steep increase in goods prices, although the rate of inflation in services charges was also a record high.

In line with slower increases in both output and new business, employment growth across the North West private sector eased in May, down to its lowest since July 2021. That said, the rate of job creation remained strong by historical standards, with many local businesses continuing to show a willingness to increase staff capacity to meet higher demand and in anticipation of greater levels of activity in the future.

Firms operating in the North West noted a slight increase in outstanding business – ie orders received but not yet completed – in May. It followed a modest decrease in backlogs the month before, and was broadly in line with the picture for the UK private sector as a whole.

There were varying trends at the sector level, with a rise in work-in-hand among the region’s service providers contrasting with a decline at local manufacturers.

Richard Topliss, chairman of NatWest North regional board, said: “Growth of business activity in the North West is starting to slow, as the momentum gained from the lifting of COVID restrictions begins to fade and sharply rising prices act as a headwind to demand.

“May saw the weakest rise in regional output for four months, with the slowdown reflecting a broader UK trend. Inflationary pressures show no signs of abating, with firms’ operating expenses rising at a record rate for the second month running amid the growing cost of energy, materials, transportation and personnel, all of which is translating into higher prices for goods and services.

“At least for now, however, businesses remain upbeat about the outlook, and more so than in almost any other area, which is helping to sustain job creation across the region.”

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