Business activity plummets as new orders drop at fastest pace on record

Business activity fell sharply in March as new orders dropped at the quickest pace on record as businesses in the West Midlands were negatively impacted by emergency public health measures to combat the coronavirus disease.

Job numbers also plummeted, while expectations slipped to the weakest in the series history. The rate of cost inflation meanwhile eased to a near four-year low.

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 – fell to 36.1 in March, down from 51.2 in February. The latest data pointed to a severe reduction in output following the outbreak of COVID-19, with the contraction accelerating to a rate not seen since the depths of the financial crisis in early-2009.

The fall in activity was commonly linked to a sharp drop in new business received by West Midlands firms in March. In fact, the rate of decline was the quickest on record, outpacing that seen during the financial crisis. Panellists often noted that an increase in uncertainty due to COVID-19 and closures of client businesses were key factors underlining the contraction.

The region was one of the worst-hit in the UK, with only Northern Ireland and Scotland recording quicker falls in new business since February.

The downturn resulted in a marked cut to workforce numbers in the West Midlands, with employment dropping at the quickest pace since June 2009 and one that was much faster than the national trend. Firms meanwhile switched operations to completing work-in-hand, which led to the sharpest reduction in backlogs for almost 11 years.

Weaker demand for inputs contributed to a slower rise in cost burdens in March, with the rate of inflation softening to the weakest since May 2016. Businesses were also supported by a fall in oil prices, although some highlighted shortages of items such as meat in the latest survey period.

Output charges meanwhile dropped for the first time in nearly four years, albeit at a marginal rate overall.

Businesses were notably less optimistic regarding future activity in March amid the sharp downturn in output and new business following the outbreak of COVID-19. The degree of positive sentiment was the lowest since the series began in July 2012. That said, the region was hopeful of a quick rebound in the economy, and recorded stronger expectations than those seen at the UK level.

John Maude, NatWest Midlands & East regional board, said: “The West Midlands saw a dramatic slowdown in business activity in March, mirroring the trend seen across the UK as a whole and most of the global economy as COVID-19 lockdown measures were put in place. Both the manufacturing and services sector were affected, as shops were forced to close while production was scaled back to align with a steep fall in new orders.

“Employment numbers were massively curtailed in the West Midlands, with regional data showing that only Scotland registered a larger drop in workforces across the UK. Nearly a million people applied for universal credit in the second half of March, so the rise in unemployment in the region is likely to be stark, despite the government’s furloughing scheme.”

Meanwhile, a report from Greater Birmingham Chambers of Commerce has revealed that the coronavirus pandemic has exacerbated existing cash flow problems that were hampering businesses during the first quarter of 2020.

According to the latest Quarterly Business Report, the region’s manufacturing and service sector firms saw their cash flow levels worsen in Q1, before COVID-19 had fully taken hold.

In the report, sponsored by Birmingham City University, 29 per cent of companies revealed their cash flow had significantly weakened – the joint highest on record since the global financial crisis of 2008.

However, manufacturing and service sector firms reported stability in domestic demand, with levels staying the same as Q4 2019.

Advanced domestic orders followed a similar trajectory. There was a four per cent increase in businesses recording an uplift in order business, but this was offset by a three per cent rise in the number of firms whose domestic orders fell.

The report comes as Secretary of State Dominic Raab revealed he doesn’t expect the UK’s lockdown restrictions to be eased in the coming days.

Paul Faulkner, chief executive of Greater Birmingham Chambers of Commerce, said: “The surveying period for our latest Quarterly Business Report covered the three months to the start of March and clearly the warning signs were there that businesses across the region were facing some extremely tough times.

“Not only did we see a fall in export demand and hiring levels, the most startling development was the number of manufacturers that were struggling to maintain a sufficient level of cash to run a sustainable and profitable business – we know from our subsequent research that this situation has become even more grave for businesses in all industries as the fallout from the Coronavirus crisis has continued to escalate.

“In this exceptional period, the Government has been right to step in to become the insurer and customer of last resort for businesses across the country.”

He added: “Looking forward, it is almost certain that the coming quarter will see dramatic falls in all indicators as the economy has been put into a ‘coronavirus deep freeze’.

“Key issues will be how long various restrictions last and what support is available to businesses when we come out the other side.”