South West business activity growth hits 11-month high

South West business activity growth has hit an 11-month high as new order growth experienced a revival.

The headline NatWest South 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 – increased to 52.9 in April from 50.6 in March, to signal a third successive monthly expansion of output across the region.

The rate of growth was the best seen since May 2022 and solid overall, but remained below that seen on average across the UK private sector as a whole.

The upturn was supported by the quickest increase in new work for nearly a year, which prompted firms to expand their staffing levels at a solid pace. This helped to improve capacity, and backlogs of work declined again in April. Cost pressures showed further signs of easing, as average input prices rose at the softest pace in over two years. Nevertheless, higher costs drove another steep rise in selling prices.

South West private sector companies signalled a further increase in overall new business during April, thereby stretching the current period of expansion to three months. Furthermore, the rate of growth was the best seen for nearly a year and solid. Companies that registered greater amounts of new work often linked this to firmer demand conditions, new product releases and improved marketing. A steeper rise in sales was also seen at the national level in April, and one that continued to outpace that seen in the South West.

After improving to a 13-month high in March, business confidence in the South West around the one-year outlook for output softened in April. The overall degree of positive sentiment slipped to a four-month low and was weaker than the UK average. Companies that were optimistic that activity will rise generally commented on hopes that economic conditions will improve, and client numbers will increase. However, some firms indicated that lingering economic uncertainty and rising costs and interest rates may dampen growth prospects.

The seasonally adjusted Employment Index moved back above the no-change 50.0 mark in April to signal the second increase in South West private sector employment in the past three months. Furthermore, the rate of job creation was the steepest seen since June 2022 and quicker than the UK-wide trend.

Anecdotal evidence indicated that businesses added to their payrolls due to rising business requirements and projections of further increases in activity in the months ahead.

The level of outstanding business at South West private sector firms fell for the ninth time in the past ten months in April. The rate of depletion was the fastest seen since last October and solid overall. Lower backlogs were often attributed to improved efficiency and sufficient capacity.

The sustained drop in unfinished workloads in the region contrasted with stable backlogs across the UK as a whole.

Operating expenses faced by South West private sector businesses increased for the thirty-fifth month in a row in April. Though rapid and quicker than the historical trend, the rate of inflation was the softest seen since February 2021. The upturn in costs was also not as sharp as that seen on average across the UK private sector.

Firms often mentioned that prices had increased across the board, with higher energy, raw material and staff costs mentioned in particular.

Average prices charged by private sector companies in the South West rose sharply at the start of the second quarter. Higher selling prices reportedly stemmed from efforts to pass on additional costs to clients to help ease pressure on margins. The rate of increase quickened fractionally from March, but was nevertheless the second-softest seen since April 2021.

The rate of output charge inflation also quickened at the national level, and was sharper than that seen in the South West.

Paul Edwards, chair of the NatWest South West regional board, said: “Private sector companies across the South West had an encouraging start to the second quarter, with firms reporting the steepest increases in output and new orders for nearly a year. Efforts to expand capacity meanwhile drove a renewed upturn in employment, and one that was solid overall. Firms have also reported a further easing in the rate of cost inflation, which dipped to its lowest in more than two years. However, concerns over lingering economic uncertainty, higher interest rates and the ongoing squeeze on clients’ budgets dampened business confidence slightly in April. Furthermore, despite cost inflation moderating, average selling prices increased at a slightly faster pace as firms looked to protect their operating margins.”