Manufacturing and service sectors return to expansion

The combined output of the region’s manufacturing and service sectors returned to expansion territory in February after signalling a sharp contraction at the start of the year.

Rising from 41.5 to 51.1, the latest reading was consistent with only a slight recovery in activity following the lockdown-induced downturn in January.

According to the NatWest West Midlands PMI Business Activity Index, where growth was reported, it was attributed to the clearing of backlogs, projects in the pipeline and reduced uncertainty.

After contracting sharply at the start of 2021, new work intakes at West Midlands companies fell only marginally in February. This was indicated by the respective seasonally adjusted index moving closer to the critical 50.0 threshold. Some firms suggested that the national lockdown restricted sales at their units, but others indicated that a reduction in uncertainty, restocking efforts among clients and online shopping underpinned demand growth.

West Midlands companies remained optimistic towards the year-ahead outlook for business activity. Almost 66% of survey participants foresee growth, with confidence pinned on hopes that the coronavirus disease 2019 (COVID-19) vaccination programme will curb the spread of infections, leading to the lifting of restrictions and a recovery in demand. The overall level of positive sentiment remained elevated, despite falling slightly from January’s four-year high.

Employment decreased in February, stretching the current sequence of contraction to 13 months.

Evidence suggested that job shedding stemmed from retirements and redundancies. That said, the overall pace of reduction eased to the weakest in a year as some firms took on extra workers to fulfil demand needs and clear backlogs of work. Still, the fall in headcounts in the region was more pronounced than at the UK level.

Private sector firms signalled a second successive monthly drop in unfinished work halfway through the opening quarter of 2021.

The rate of depletion was moderate, despite quickening from January, and much softer than the UK average. Local companies reported increased efforts to clear pending work.

Amid reports of material shortages as well as higher prices for freight, metals, packaging and plastics, average input costs at West Midlands companies increased in February. The rate of inflation was sharp and the second-fastest in over two-and-a-half years (behind December 2020). Moreover, the rise was the eighth in consecutive months.

February data highlighted a ninth successive monthly rise in prices charged for goods and services across the West Midlands. The rate of inflation remained marked, despite easing slightly from January’s near two-and-a-half year high. Those survey members that hiked their fees indicated that additional cost burdens had been shared with clients.

John Maude, NatWest Midlands and East regional board, said: “Despite the ongoing national lockdown, West Midlands companies managed to lift business activity in February as some diverted resources towards the completion of backlogs of work. This is welcome news, particularly after January’s marked fall in output and given that contractions had been sustained across many other UK regions.

“The COVID-19 vaccination programme has lifted spirits, with West Midlands firms strongly optimistic towards growth prospects. The upbeat sentiment failed to translate into job creation, but employment declined only slightly in February.

“With new orders nearing stabilisation and a roadmap for the lifting of lockdown restrictions now laid out, a recovery in economic conditions is anticipated in the year ahead.”