Business activity in the South West declined for the first time since the start of the year amid a drop in demand, according to a new NatWest report.
The bank said its South West PMI 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 - had dropped below its neutral threshold for the first time since January.
NatWest said this was in contrast to a “solid expansion” of output across the UK as a whole, with a fall in new business placed with firms in the region during June - the first contraction in five months
A survey found that firms which had registered lower sales linked this to squeezed client budgets, due to the rising cost of living and tighter financial conditions. There were also reports of customers adopting more cautious inventory policies due to economic uncertainty.
Although South West companies reported weaker output and new order trends in June, optimism around the year ahead improved to its highest for three months.
Firms told researchers they anticipated that forecasts of stronger economic conditions, planned company expansions and new project starts could support growth of output over the next 12 months. However, the overall degree of positive sentiment remained below the national average, with some firms expressing concerns over the impact of higher interest rates on client spending.
NatWest’s seasonally adjusted employment index signalled a third consecutive monthly rise in staff numbers at private sector firms in the South West, with the rate of payroll expansion the second-quickest seen since July 2022.
The bank said the pace of job creation also remained quicker than the UK-wide trend, with anecdotal evidence indicating that companies added to their workforce numbers to increase capacity - often in anticipation of firmer demand conditions in the months ahead.
The data pointed to a further sharp rise in operating expenses faced by South West private sector firms. Where greater cost burdens were reported, companies often mentioned increased staff wages and utility payments. However, the overall rate of inflation edged down to a 28-month low.
Paul Edwards, chair of NatWest’s South West regional board, said: "The South West's economy had a disappointing end to the second quarter, with businesses noting lower levels of activity and new work for the first time in five months. Greater pressure on client budgets due to the rising cost of living and higher borrowing costs had reportedly strained sales, while there were also reports of customers reining in spending due to the weaker economic climate.
“However, optimism around the 12-month outlook for output improved to a three-month high. This upbeat mood supported a further strong rise in employment, which in turn led to a steeper fall in backlogs. Cost pressures meanwhile eased to their weakest in over two years, adding to hopes that the worst of the cost of living crisis is now behind us."
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