Downturn in region’s economy continues but outlook improves

The West Midlands saw private sector business activity fall for the second month running in December, matching the trend seen across the UK as a whole.

However, according to the latest PMI® data from NatWest, the region posted a rise in new orders for the first time in four months and local firms reported stronger optimism towards future output.

The headline West Midlands Business Activity Index – a seasonally adjusted index that measures changes in the combined output of the region’s manufacturing and service sectors – registered 49.3 in December, little-changed from November’s 49.4 and matching the UK-wide reading. It marked a slight drop in business activity that was broadly in line with the trend seen during 2019.

Underlying data showed that December’s decrease in output was centred on the manufacturing sector, where there were reports of political uncertainty weighing on client demand. Though avoiding a contraction, business activity across the region’s services economy was also subdued.

Following decreases in each of the previous three months, inflows of new work at West Midlands firms returned to growth in December. That said, the increase was only marginal, as greater new business at services providers was partially offset by a sustained fall in manufacturing order book volumes.

Firms in the West Midlands continued to make inroads into their backlogs of work during December. The rate of depletion was marked and little-changed from that recorded in November.

A lack of pressure on capacity continued to be reflected in firms’ recruitment activity, with private sector employment unchanged from November. Nevertheless, this represented somewhat of an improvement on the staff cuts seen in each of the previous four months.

Average prices charged for goods and services by firms in the West Midlands rose only marginally in December. The increase was the second-weakest in the current three-and-a-half-year sequence of inflation, as firms reported competitive pressures weighing on their pricing power.

The slower rise in output charges was also in line with a further moderation in the rate of input cost inflation, which eased to the lowest since May 2016.

Firms’ expectations for output over the coming 12 months improved to a seven-month high in December. Only the East Midlands and South West recorded greater optimism. That said, confidence was still below the series average (since July 2012).

John Maude, NatWest Midlands & East regional board, said: “Recent trends in the West Midlands economy have largely mirrored those seen across the UK private sector as a whole, with business activity and hiring hampered by political and economic uncertainty. However, there are already signs of the tide starting to turn, with local firms reporting the first increase in order book volumes for four months in December and business confidence on the rise amid hopes of the release of pent-up demand.”