Business conditions deteriorate across the South West in March

Reports | South West

The latest NatWest PMI® survey data signalled renewed falls in business activity and new orders across the South West private sector amid reports of heightened Brexit-related uncertainty.

Though the rates of reduction were marginal, it was the first time output and sales had fallen since last November. At the same time, a lack of incoming new work enabled firms to work through their unfinished business, while subdued client demand and efforts to contain costs led to a slight reduction in headcounts. Notably, average input costs continued to rise sharply in March, which underpinned a further rise in prices charged.

The headline South West Business Activity Index – a seasonally adjusted index that measures the combined output of the region’s manufacturing and service sectors – posted below the neutral 50.0 level at 49.8, down from 52.1 in February. Though indicative of a fractional rate of decline, the latest reading signalled the first reduction in output across the region for four months. Furthermore, it was only the second time business activity had fallen since July 2016. At the UK level, output stagnated at the end of the first quarter.

Driving the reduction in business activity was a renewed fall in total new orders received by South West private sector firms in March. Though marginal, the latest reduction in new work was the steepest seen since the aftermath of the Brexit referendum in July 2016. New orders also fell across the UK as a whole, and for the third month in a row.

A lack of incoming new work led firms to fulfil outstanding business in March. Though only slight, it was the fifth time backlogs of work had fallen in as many months.

A lack of pressure on capacity and efforts to reduce overall costs underpinned a further marginal reduction in headcounts across the South West private sector. In contrast, employment rose slightly at the national level.

Average input costs faced by South West private sector firms continued to rise sharply at the end of the first quarter, despite the pace of inflation softening to an 11-month low.

Companies partly passed on greater cost burdens to clients in the form of higher prices charged, though the rate of increase remained softer than that seen for input costs.

South West private sector firms were generally more positive than the average UK company in March regarding the 12-month business outlook. Notably, the degree of optimism strengthened from February. A number of firms anticipate activity to improve once the UK’s exit from the EU becomes clearer.

Chris Preston, Chair, NatWest South West Regional Board, commented: “The South West had a disappointing end to the first quarter of 2019, with firms signalling renewed falls in both business activity and new orders in March. Companies often blamed the deteriorating business environment on lingering Brexit uncertainty, which has led many clients to press the pause button on any projects until the outlook becomes clearer. As a result, firms trimmed their staffing levels for the second month running.

“As well as lower amounts of new work, companies signalled a further squeeze on operating margins, as input costs continue to increase at a notably sharper pace than output prices. However, firms are likely unable to hike their charges at a quicker pace without the risk of losing more business.

“Going forward, it seems that the South West private sector may continue to struggle unless the UK’s exit from the EU becomes clearer and confidence is restored.”

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