New business activity declines for the fifth month straight
Price pressures and a challenging economic climate restricted sales of West Midlands goods and services at the end of 2022, according to the NatWest PMI, thereby resulting in another decline in output.
At 48.9 in December, little-changed from 48.8 in November, the headline 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 – highlighted a fifth successive contraction.
However, the rate of reduction was slight overall and broadly in line with the national average. Local firms suggested that lower sales, staff absences, high stock levels at clients and uncertainty all dampened business activity.
Private sector companies in the West Midlands noted a further decline in intakes of new business at the end of 2022, stretching the current sequence of contraction to seven months. Moreover, the pace of reduction was solid and the second-quickest over this period. Where a fall was signalled, panellists mentioned recession fears among clients, subdued consumer spending and price pressures. The local contraction in sales was sharper than the national average.
Although employment across the West Midlands private sector continued to rise in December, the rate of growth eased to the weakest in the current 22-month sequence of expansion and was marginal. While some companies sought to fill open positions, others trimmed workforce numbers due to sustained declines in new business. Yet, the trend for jobs in the West Midlands was the third-best seen regionally, behind the South East and North West.
Outstanding business volumes decreased for the first time in three months during December. Moreover, the rate of depletion was marked and the quickest since October 2020. Anecdotal evidence indicated that lower inflows of new business enabled the clearing of unfinished work.
The average input costs of West Midlands companies continued to increase sharply at the end of the final quarter of 2022. That said, the rate of inflation softened to the weakest since March 2021. Monitored companies noted higher energy, food, labour, material and overhead costs. The upturn was reportedly curbed by contained fuel prices and fee reductions for some critical items. The local rate of input cost inflation was broadly in line with the national average.
As has been the case on a monthly basis for over two-and-a-half years, prices charged for goods and services in the West Midlands rose in December. The rate of inflation was sharp, above its long-run average and the quickest in three months. The pass-through of rising expenses to clients was cited by survey participants as the main reason for the latest upturn in selling prices. The West Midlands topped the regional rankings for output charge inflation at the end of the year.
The Future Activity Index remained below its long-run average in December, despite rising to a four-month high. Those companies that foresee output growth in the year ahead pinned optimism on new product releases, projects in the pipeline and marketing efforts. Firms that were downbeat mentioned recession risks, a challenging economic climate and weak underlying demand. The West Midlands came third in the regional rankings for business confidence.
Rashel Chowdhury, NatWest Midlands and East regional board, said: “December data showed a lacklustre performance for the West Midlands economy, with a mild fall in output triggered by a solid reduction in new business as clients trimmed spending due to price pressures and difficult economic conditions. These factors also limited business confidence towards growth prospects and curbed job creation substantially. Although there was an improvement in optimism from November, sentiment remained at a low ebb. The local economy entered 2023 on a less than ideal footing, with a subdued outlook, rising interest rates, squeezed household incomes and tight fiscal policy suggesting that an imminent recovery seems highly unlikely.”