Private sector companies across the South West continued to face challenging market conditions in September, according to the latest business activity report, leading to confidence slipping to the lowest level in 2023 to date. 

The headline NatWest 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 – picked up from August's nine-month low of 46.7 to 47.8 in September.

The index has now posted in contraction territory for four successive months, though the latest reduction in activity was only modest. Across the UK as a whole, business activity fell for the second straight month, though the rate of contraction remained softer than that seen in the South West.  

Private sector companies in the South West recorded a further reduction in overall new business during September, thereby stretching the current period of decline to four months. Whilst not as severe as that seen in August, the rate of contraction was solid overall.

Tighter client budgets, elevated inflation and weaker confidence all weighed on customer spending, according to panellists. New orders also fell across the UK as a whole, though the pace of decline remained weaker than that seen in the South West. 

Although South West private sector firms anticipate business activity to expand over the next year, the level of positive sentiment weakened in September. Notably, the degree of optimism was the lowest seen in 2023 to date and below the UK-wide average.

While some companies expressed hopes that economic conditions will improve and investment in new technology and marketing will aid growth, there were concerns related to tighter financial conditions and the associated pressure on client expenditure going forward. 

After rising in each of the five prior months, workforce numbers at South West private sector firms declined in September. Though modest, the rate of job shedding was the quickest recorded since December 2022.

According to panellists, the non-replacement of voluntary leavers and cost control measures had weighed on recruitment. A fresh fall in employment was also seen at the national level, with the rate of reduction slightly quicker than that seen in the South West. 

Backlogs of work continued to fall sharply at private sector companies in the South West during September. Notably, the rate of depletion eased only slightly from August's 38-month record and remained steeper than the UK-wide trend. Fewer new orders and improved supply chain performance had supported the latest decline in outstanding work, according to survey respondents.  

As has been the case since June 2020, average input prices across the South West private sector increased at the end of the third quarter. The rate of inflation edged down slightly to the lowest in 31 months, but remained sharper than the historical trend. The upturn also continued to outpace that seen on average across the UK. Where higher cost burdens were reported, firms generally linked this to greater fuel, energy and staff expenses.  

Adjusted for seasonal factors, the Prices Charged Index posted above the neutral 50.0 threshold to signal a further rise in average selling prices set by South West private sector firms in September. Whilst the rate of charge inflation was the softest in 31 months, it remained well above the long-run average.

Companies often mentioned raising their own prices to pass on higher operating expenses to customers. Output charges also rose at a historically strong pace at the national level, albeit one that remained slightly softer than that seen in the South West.  

Paul Edwards, chair of the NatWest South West Regional Board, said: "Private sector companies across the South West continued to face challenging market conditions in September, with weak demand leading to a further decline in business activity.

"High interest rates, the rising cost of living and uncertainty over the economic outlook all weighed on customer spending, with budgets coming under greater scrutiny. While there were signs of overall inflationary pressures easing in September, rates of both input cost inflation and output charge inflation remained elevated by historical standards to underscore how stubborn cost pressures still are. 

"This gloomier assessment of the outlook also fed through to confidence, which slipped to the lowest level in 2023 to date. At the same time, efforts to contain costs contributed to the first reduction in employment across the South West for six months.

"As backlogs of work continued to fall sharply, which points to spare capacity across the region, it's likely that firms could cut back further on output until we see demand revive."