Falling business activity signals a challenging start to the year

A renewed decline in business activity in January signalled a difficult start to the new year for firms across the North West, the latest Regional PMI data from NatWest showed.

However, amid further signs that cost pressures had passed their peak, local businesses reported increased optimism towards the year-ahead outlook and continued to take on additional staff.

The headline North West PMI 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 – slipped back into sub-50 contraction territory in January, dropping from 50.0 in December to 47.2.

The latest reading marked the fourth decrease in business activity in the past five months, and a rate of decline that was the quickest for two years.

The downturn was led by weakness in manufacturing output, underlying data showed.

January data indicated that demand for goods and services across the North West remained under pressure from soaring prices, tightening financial conditions and market uncertainty.

Inflows of new business fell for the seventh month in a row, and at a quicker rate than in December.

Underlying data showed decreases in new orders across both manufacturing and services, with the former recording the sharper rate of decline by far.

There was a notable improvement in business confidence across the North West private sector at the start of the year.

Expectations rebounded further from last October’s recent low to the highest for eight months, and were even slightly stronger than the UK-wide average. Those firms that reported optimism towards the outlook commented on new product development and hopes of a turnaround in demand.

Despite lower business activity levels in January, firms across the North West continued to take on additional staff during the month, citing the filling of vacancies and efforts to drive growth.

The rate of job creation was only modest, however, and the second weakest in the current 23-month sequence of expansion in employment. The result also masked a sustained decline in manufacturing workforce numbers.

A lack of incoming new business, combined with a continued expansion in staff numbers, resulted in less pressure on business capacity across the North West private sector in January.

Local firms were able to reduce backlogs of work for an eighth successive month, with manufacturers noting a particularly sharp rate of depletion. The decline in outstanding business broadly matched the trend for the UK as a whole.

The rate of input price inflation faced by firms in the North West remained elevated by historical standards in January, amid reports of ongoing pressure from high energy costs and wage demands.

That said, having eased for the eighth month in a row, it was the weakest since February 2021 and the slowest among the 12 nations and regions monitored by the survey.

Many firms sought to pass on at least part of the burden of higher costs during January, resulting in a further steep rise in average prices charged for goods and services.

The rate of output price inflation even ticked up slightly, after having reached a 22-month low in December, although it was still some way below the record highs observed in 2022. Underlying data showed similar rates of increase in both factory gate prices and charges set by services firms.

Malcolm Buchanan, chair of NatWest North regional board, said: “January’s PMI survey results were somewhat of a mixed bag, revealing both positive and negative developments across the North West economy at the start of the new year.

“Starting with the not-so-good news, we saw business activity return to contraction after briefly stabilising in December, with demand continuing to be strained by a combination of soaring prices and tightening financial conditions.

“However, whilst remaining elevated, businesses’ cost pressures continue to subside, boding well for the prospect of lower inflation in the coming months. Positively, local firms have grown in confidence about the outlook, which has, in turn, led to resilience in the labour market as firms continue to fill vacancies.”