Decline in business activity slows as new orders nearly stabilise

West Midlands output decreased further at the start of 2023 but the downturn was mild and the slowest in three months, according to the NatWest PMI.

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 – was at 49.0 in January, little-changed from 48.9 in December and signalling the weakest rate of contraction since last October.

Some companies lowered output due to reduced new business, while others signalled growth amid tentative signs of an improvement in demand and successful marketing efforts. The local fall in output was the second-weakest of the 11 regions that noted a decline.

There was only a fractional decline in new business placed with West Midlands companies in January, as signalled by the respective seasonally adjusted index posting close to the 50.0 neutral level. Some companies noted a fall in new work intakes due to challenging economic conditions and subdued demand, but others indicated that marketing efforts and new contract wins supported sales. The West Midlands saw the slowest contraction in new business of the eight regions that posted a reduction.

Average input costs at West Midlands companies continued to rise sharply in January, but the rate of inflation eased to the weakest since March 2021. Beverages, food, labour, utility and raw materials were cited as key sources of cost pressures. The latest increase was reportedly curbed by a moderation in prices for fuel, metals and plastics.

In line with a softer increase in input costs, there was a slower upturn in prices charged for goods and services in the West Midlands. The overall rate of output price inflation was the slowest seen in close to a year-and-a-half, though remained well above its long-run average. The local rate of charge inflation was broadly aligned with the UK average.

January data pointed to a further expansion in private sector employment across the West Midlands. The latest rise was the twenty-third in as many months and strong relative to its long-run average. Where growth was reported, panellists mentioned the replacement of voluntary leavers and investment in the future capability of their business. The trend for local jobs was the second-best regionally, beaten only by Northern Ireland.

As was the case in December, unfinished business volumes at West Midlands companies declined during January. Despite easing from the previous month, the pace of backlog depletion remained marked. Monitored companies indicated that a combination of expanded capacities and subdued intakes of new orders allowed for the completion of pending workloads.

Private sector companies in the West Midlands expect output levels to be higher in 12 months’ time. Moreover, the degree of optimism registered in January was the best seen since February 2022.

Firms indicated that marketing efforts, investment, new product launches, contained inflation and an improvement in demand could support business activity. Regionally, the West Midlands recorded the highest level of business sentiment.

Rashel Chowdhury, NatWest Midlands and East Regional Board, said: “Although the West Midlands economy remained in contraction territory at the start of 2023, the latest results highlighted tentative signs that economic conditions are at least moving in the right direction. A near stabilisation of sales restricted the fall in business activity and companies maintained a positive mindset towards the outlook. Local firms continued to invest in the future capability of their business, taking on extra staff to prepare for a recovery in demand. The outlook for consumer spending remains clouded with uncertainty, however, amid squeezed household income due to elevated inflation, rising interest rates and energy price volatility.”