Region’s private sector recovery continues in August

The region’s private sector recovery continued in August with a strong increase in activity despite a slip in business sentiment, a new report has revealed.

The NatWest West Midlands 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 – came in at 61.9 in August, unchanged on July.

The latest reading continued to indicate a strong increase in business activity midway through the third quarter.

Private sector firms in the West Midlands reported a further increase in new business during August, with the rate of growth remaining substantial, albeit easing from July.

The reopening of businesses in greater numbers remained a key factor driving higher sales. Growth in new business in the West Midlands was the second-fastest across the monitored 12 regions, surpassed only by the North East.

Business expectations regarding the outlook for output over the next 12 months were less positive in August than July. The Future Business Activity Index dropped nearly 10 points to its lowest level for three months. Firms that expect lower output in the year ahead generally mentioned still-subdued economic conditions while optimism was driven by expectations of market conditions returning to normality in the coming months. The degree of confidence was among the lowest across the 12 monitored regions.

Private sector firms continued to cut workforce numbers midway through the third quarter, with the rate of job culling quickening from July to a severe pace. Anecdotal evidence suggested that the drop in staffing numbers was due to redundancies.

August data indicated a modest decline in the level of outstanding business at private sector firms in the West Midlands, as reflected by the respective seasonally adjusted index coming in below the no-change 50.0 mark. Manufacturing and service sector firms both recorded reductions in backlogs, with the former reporting a sharper decline.

Input costs faced by private sector firms in the West Midlands rose for a second straight month in August. The rate of inflation intensified from July and was the sharpest for six months. Increased expenses were linked to supplier fee hikes, increased wage costs and greater prices for input materials. The increase in input prices was reported across both manufacturing and services sectors, but the latter recorded a noticeably sharper rate of inflation.

Firms in the West Midlands raised their output charges for a third month running during August. The rate of inflation accelerated from July but remained modest overall. Respondents that reported higher charges commented on adjustments to their price lists following a faster rise in cost burdens.

John Maude, NatWest Midlands & East regional board, said: “The rebound in business activity across the West Midlands private sector economy was sustained in August as companies continued to recover from the COVID-19 related downturn.

“Further encouragement came from a substantial strengthening in demand conditions in the middle of the third quarter as businesses resumed operations in greater numbers. New orders from both domestic and external clients increased further during August. Business sentiment also remained positive, though the degree of optimism moderated.

“The survey raised a couple of concerns, however. First, business expenses rose sharply again. Second, job losses persisted into August as firms increasingly sought to control rising costs. Growth in sales, while strong, remained insufficient to absorb excess capacity. Consequently, the reduction in employment intensified amid reports of redundancies.”