Business activity expands at record pace in May

WLL JOHNSTON PHOTOGRAPHY

Companies based in the South West reported a sharp and accelerated rise in business activity in May, according to the latest UK regional PMI® data from NatWest. At 64.4, 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 – rose from 59.8 in April to signal a third successive monthly increase in output. Notably, the rate of expansion was the steepest recorded since the survey began in January 1997. The upturn was also quicker than the UK-wide average.

Latest survey data pointed to a steeper increase in new orders received by South West private sector companies during May. Notably, the rate of expansion was the quickest recorded since December 2013 and rapid. Companies that registered higher sales generally linked this to the further easing of lockdown measures, the vaccine rollout and more forward bookings. New business across the UK as a whole rose at a slightly faster rate than in the South West.

South West private sector firms generally expect activity to be higher than current levels in 12 months’ time. The overall degree of optimism slipped from April to a four-month low, and was not quite as strong as the UK-wide average, but remained much stronger than the historical average. Anecdotal evidence indicated that growth forecasts were driven by hopes of an end to the pandemic and associated restrictions, and further increases in client demand.

Adjusted for seasonal factors, the Employment Index pointed to a third successive monthly increase in staffing levels at South West private sector firms. Moreover, the rate of job creation accelerated to its quickest for over six years. That said, the upturn was not quite as strong as that seen at the national level. Higher staff numbers were frequently linked by firms to greater amounts of new work and efforts to expand capacity.

After rising for the first time in two-and-a-half years in April, outstanding workloads at South West private sector firms increased further in May. Moreover, the rate of accumulation was the quickest on record and sharp. According to panel members, higher new orders, supply chain delays and insufficient staff numbers drove the latest upturn in backlogs. A sustained rise in unfinished work was also recorded at the national level in May, though the rate of growth was not as marked as that seen in the South West.

The rate of input cost inflation across the South West accelerated for the fourth month in a row during May. Furthermore, the increase in expenses was the quickest seen since the start of 2011. Input prices rose at a similarly rapid pace across the UK economy as a whole. Companies that registered higher operating expenses attributed this to greater raw material prices, often due to low stock levels at vendors, and increased freight costs.

In line with the trend seen for input costs, prices charged by private sector companies in the South West rose at a faster rate in May. Notably, the rate of inflation was the fastest seen since the series began in November 1999. Panellists frequently mentioned hiking their prices in order to pass on higher expenses on to clients. A substantial increase in output charges was also seen at the national level in May, albeit one that was not quite as sharp as that seen in the South West.

Paul Edwards, Chair, NatWest South West Regional Board, said: “Private sector firms in the South West registered the sharpest increase in activity since the survey began in 1997 during May, driven by a marked rebound in customer demand as pandemic restrictions eased further and market confidence improved.

“The rapid turnaround in conditions strained operating capacities, however, despite firms adding to their payrolls again in May, as backlogs of work expanded at a record pace. Greater amounts of unfinished work were partly linked to supply chain disruption and supplier shortages, which in turn drove the steepest increase in input costs for over a decade. Higher expenses were generally passed on to customers, with selling prices rising at the quickest rate since the series began over 21 years ago.

“It will be important to monitor the strain on supply chains and costs, as they may limit firms’ operations and weigh on margins in the months ahead.”