There was a renewed fall in business activity following a quicker deterioration in demand conditions across the West Midlands during August, according to new research. The latest NatWest PMI Business Activity Index report, a seasonally adjusted index that measures the month-on-month change in the combined output of the region's manufacturing and service sectors, slipped from 50.3 in July to 49.3, pointing to the first drop in three months but one that was marginal overall.
Panellists attributed the contraction to reduced client purchasing, consumers trimming expenditure, economic uncertainty and product availability issues. For the third month running, new business placed with private sector companies in the West Midlands declined in August.
The rate of contraction was modest but accelerated to the fastest since the start of 2021. Where a fall was reported, survey participants mentioned subdued demand conditions amid economic uncertainty.
The local trend for sales compared with a broad stagnation at the UK level. Private sector companies in the West Midlands signalled another sharp upsurge in their operating expenses halfway through the third quarter.
Greater energy, food, fuel and staff costs were among the key sources of inflation cited by panellists. Nevertheless, the overall rate of increase softened to a 17-month low amid softer pressures from freight and some material (particularly metals) prices.
The West Midlands recorded the lowest rate of inflation out of the 12 monitored UK regions. In contrast to the slowdown in cost inflation, there was a faster upturn in prices charged for goods and services in the West Midlands during August.
The rate of increase quickened only fractionally from July's seven-month low and was above its long-run average but was nevertheless the second-lowest in 2022 so far. Around 32 per cent of panellists reported higher fees, compared with five per cent that offered discounts.
The local rate of charge inflation outpaced the UK average. West Midlands firms remained upbeat regarding the year-ahead outlook for business activity but confidence fell to its second-lowest level since October 2020 (surpassing May 2022).
Inflation concerns, recession fears and energy price volatility were among the key factors dragging down optimism. Regionally, the West Midlands came fourth out of 12 in the rankings for business confidence.
August data continued to show job creation in the West Midlands private sector economy, though the rate of increase softened to the second-slowest in the current 18-month sequence of expansion. Where staff numbers rose, panellists commented on the replacement of voluntary leavers, efforts to fill outstanding vacancies and predictions of a pick-up in demand.
Others suggested that skill shortages, a lack of new work and resignations led to lower headcounts. Outstanding business volumes at private sector firms in the West Midlands decreased in August, ending a 17-month sequence of accumulation.
Moreover, the pace of depletion was solid and the fastest in close to two years. Anecdotal evidence indicates that a combination of efficiency gains and reduced sales aided the renewed drop in unfinished work.
John Maude, a member of NatWest's Midlands and east regional board, said: "The latest results clearly show the harmful consequences of inflation and uncertainty on the West Midlands economy. There was a third successive decline in new work intakes in August as consumers continued to tighten the purse strings due to the rising cost of living.
"Firms responded to subdued conditions by scaling back business activity and reassessing growth projections downwards as recession fears deepened. Although it was welcoming to see a further retreat of cost inflationary pressures, the results showed a broadly unchanged rate of increase in prices charged for local goods and services.
"As companies face higher expenses themselves and seek to pass this on to clients at a time when consumers are cutting back on non-essential spending, a meaningful recovery in the West Midlands economy is looking more distant."
