June survey data signalled a further notable slowdown in the rate of business activity growth across the south west private sector, says NatWest.

The latest NatWest PMI® data pointed to the weakest increase in output since March 2021 that was only mild overall. The softer rise in activity coincided with only a marginal expansion in new orders, as firms indicated that the cost of living crisis and increasingly uncertain economic outlook had led clients to become more hesitant to spend.

Prices data indicated that inflationary pressures remained substantial, with rising costs and worries over the economy also dampening business confidence to its lowest level in over two years.

The headline NatWest South West 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 – declined from 55.0 in May to 51.2 in June, to signal only a modest increase in business activity. Notably, the rate of growth was the slowest seen for 15 months and weaker than the UK average.

Private sector firms in the South West registered a further increase in new orders during June, thereby stretching the current run of rising sales to 16 months. That said, the rate of growth slowed notably on the month to a marginal pace that was the slowest seen over this period. According to panel members, uncertainty over the economy and reduced client spending amid the cost of living crisis dampened new business.

New orders also expanded at a slightly slower rate at the national level and only slightly.

Although south west private sector companies anticipate a further expansion in output over the next year, overall optimism weakened somewhat in June. Moreover, the level of positive sentiment was the lowest seen for 26 months and slightly weaker than the UK average. Businesses mentioned a number of headwinds to growth, including signs of an economic slowdown, higher interest rates, rising costs and strained supply chains.

Staffing levels at south west private sector firms increased for the sixteenth successive month in June. Though sharp and above the series average, the rate of job creation was the softest seen since last November. The upturn was also slightly weaker than that seen at the national level. While a number of firms stated that they had taken on extra staff due to rising business requirements, others commented on difficulties filling vacancies and subsequent challenges replacing staff leavers.

The seasonally adjusted Outstanding Business Index registered above the neutral 50.0 mark to signal a sustained rise in backlogs of work at South West private sector companies during June. There were reports that staff and material shortages had impacted firms' abilities to process and complete orders. The rate of accumulation slowed from May, but remained solid overall and was quicker than the UK-wide trend.

Average cost burdens faced by private sector firms in the South West continued to rise rapidly in June. Furthermore, the rate of inflation eased only slightly from May and was the third-sharpest on record (since January 1997). The rate of increase remained slightly softer than that seen across the UK as a whole, however.

Greater cost burdens were frequently linked by panel members to rising energy, fuel, food, raw materials and wage expenses. There were also reports of companies raising salaries due to greater competition for workers and efforts to improve staff retention.

In line with the trend seen for average input costs, prices charged by south west private sector businesses continued to rise markedly in June. That said, the rate of increase edged down to a four-month low and was among the softest seen of the 12 UK regions monitored by the survey. There were widespread reports of firms raising their fees to try and pass on additional costs to clients.

Paul Edwards, chair of NatWest South West Regional Board, said: “The latest NatWest PMI data highlighted a further marked slowdown in business activity growth across the south west, suggesting that the performance of the sector over Q2 has been far less robust than that seen in the opening quarter of 2022.

"The current cost of living crisis, which is pushing up expenses for both companies and households, weighed heavily on expectations for the year ahead, which hit their lowest in over two years. Combined with rising interest rates and a slowdown in economic activity, this could dampen new business and output further in the months ahead."