Business confidence in the South West slipped to its lowest level for nearly two years in March due to rising costs and labour shortages, according to new research.
The latest regional PMI data from NatWest showed price pressures on firms intensified last month, with a quicker rise in input costs feeding through to an unprecedented increase in output charges.
Many firms surveyed anticipated activity would continue to recover due to relaxation of Covid-19 restrictions, but there were concerns over rising costs, supply chain disruption and labour shortages.
Although the level of work-in-hand (but not yet completed) continued to rise across South West private sector companies in March, the rate of increase slowed for the second successive month.
Moreover, the pace of accumulation was the slowest seen since the current period of expansion began a year ago and only marginal.
Higher backlogs were often linked to rising sales, but some firms mentioned that higher staff numbers had helped to alleviate some pressure on capacity.
Average input costs faced by private sector firms in the South West increased for the twenty-second month in a row in March.
Notably, the rate of inflation was the joint-second strongest in the series history (beaten only by November 2021). The upturn was not quite as sharp as that seen at the national level, however.
Surveyed firms indicated a widespread increase in expenses, with energy, fuel, labour, transport and raw materials mentioned in particular.
Adjusted for seasonal factors, the Prices Charged Index pointed to a sustained rise in output charges set by South West private sector companies in March.
Furthermore, the rate of inflation was the sharpest seen since the series began in November 1999. Where higher selling prices were reported, companies often linked this to the pass-through of additional costs to customers.
Despite this, the survey found South West firms in the region registered sharper increases in business activity, new work and employment at the end of the first quarter, as market conditions continued to recover from pandemic-related disruption.
The data pointed to a sharp and accelerated rise in staffing levels at South West private sector firms at the end of the first quarter, with the rate of job creation the steepest seen since August 2021.
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 59.6 in February to 64.3 in March, representing the sharpest increase in output since May 2021.
The upturn was the joint-strongest seen of all 12 monitored UK regions, on a par with Yorkshire and Humber.
The seasonally adjusted New Business Index pointed to a further improvement in overall new orders received by South West private sector firms in March. Furthermore, the rate of growth quickened for the third month in a row to reach the strongest since May 2021.
Anecdotal evidence obtained by the survey indicated firms expanded their workforce numbers to meet rising customer demand and due to efforts to fill vacancies.
On a regional basis, only London registered a faster increase in employment than that seen in the South West.
Paul Edwards, chair of NatWest South West regional board, said: “Business activity across the South West surged at the quickest rate for 10 months in March as the impact of the pandemic continued to fade and customer demand strengthened further.
“Notably, the South West, along with Yorkshire and Humber, posted the sharpest rise in output of all 12 UK regions at the end of the first quarter.
He added: “The recovery was accompanied by further steep increases in costs, however, which led to a record upturn in selling prices. Rising expenses, supply chain disruption and labour shortages weighed on business confidence, which fell to a 23-month low.”
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