Business activity in the North East has fallen for a second month in a row and the region has maintained its position as the weakest economy in the UK, according to an influential business survey.
The NatWest North East Business Activity Index, which measures the combined output of the region’s manufacturing and service sectors, came in at 48.4, broadly unchanged from last month, with figures below 50 signalling a contraction in the economy.
Factors such as Brexit and the rise of Covid cases in China had increased supply chain pressures, while costs rose again. The North East was the weakest performing region of the survey’s 12 monitored UK areas for the 10th month in a row.
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Firms in the North East private sector displayed strong optimism and there was a rise in employment levels in the latest survey period. Where job creation was reported, firms said that higher pay was attracting additional staff, though this was partially offset by some firms reducing their workforces in response to subdued demand.
The survey has been released as new figures show that the UK economy contracted for the second month in a row in April as all three main sectors suffered a fall in output for the first time since January 2021.
Richard Topliss, chairman of North regional board at NatWest, said: “Private sector firms in the North East reported a second successive contraction in business activity in May, as price and supply pressures were compounded by Brexit and trade disruptions. Both activity and new orders were scaled back, with the latter falling for the third month running.
“Raw material and labour shortages remained marked, which led North East based businesses to report a fresh series record increase in average cost burdens. Higher input costs were partially passed through to clients as prices charged for goods and services rose at a record rate for the fourth month in a row.
“Positively, business optimism regarding the year-ahead outlook for activity strengthened for the first time since January amid hopes that a broad recovery in supply chains would help to stimulate a strong rebound in activity and demand.”
Figures released by the Office for National Statistics this morning show that gross domestic product (GDP), a measure of the size of the economy, fell by 0.3% in April. Experts had been expecting a 0.1% rise.
The ONS said it marked the first time GDP has fallen for two months in a row since March and April 2020, when the pandemic first hit and sent the economy tumbling.
The figures showed output contracted by 0.3% in the main services sector, largely due to the ending of the Government’s Covid-19 test-and-trace programme and lower vaccination activity. With the test and trace and vaccines impact stripped out, GDP would have risen by 0.1% in April, the ONS said.
But there were also declines in the manufacturing and construction sectors, down 1% and 0.4% in April respectively, with manufacturers in particular noting the impact of soaring prices and supply chain woes.
Chancellor Rishi Sunak said: “Countries around the world are seeing slowing growth, and the UK is not immune from these challenges.
“I want to reassure people, we’re fully focused on growing the economy to address the cost of living in the longer term, while supporting families and businesses with the immediate pressures they’re facing.”
But David Bharier, head of research at the British Chambers of Commerce, said: “Businesses from all sectors are facing unprecedented rises in raw material costs, soaring energy bills, and wage pressures. The introduction of an increase to employer National Insurance Contributions in April has only further added to firms’ woes.
“This declining output comes off the back of two years of significant damage sustained by small businesses, whose weakened cash positions mean that they are in a far worse position to stomach further pressure. The global aspects to all these problems mean they are likely to weigh heavily on the UK’s prospects for growth for some time.
“Output in consumer-facing services increased by 2.6% in the month, reflecting increased consumer spend on hairdressing and food services. However, the sector remains below pre-pandemic levels, highlighting the significant damage sustained from shutdowns and restrictions.
“Declining business investment remains a serious cause for concern and urgent Government action is needed to halt this fall. Cutting VAT on businesses’ energy bills to 5% would ease the squeeze on firms’ cashflow and give them some room for manoeuvre.”
