Royal Bank of Scotland : Slowdown in UK growth in November led by downturn in London business activity

The latest NatWest Regional PMI® showed markedly different trends in performance across areas of the UK private sector midway through the fourth quarter, with downturns in activity in London, the North East and South West contributing to a slowdown in overall UK growth. A particular bright spot was the East Midlands, which registered the strongest output growth for the second month running.

The East Midlands Business Activity Index read 54.5 in November, ahead of those for Northern Ireland (53.7) and Yorkshire & Humber (52.9). The Index measures changes in the combined output of the region's manufacturing and service sectors, and any reading above 50.0 signifies growth from the previous month. In all three cases, growth was slightly faster than in October. The North West (52.2) was the only other region that enjoyed a quicker pace of expansion, with an unchanged rate of growth seen in the South East (52.7).

Scotland (52.2) and Wales (51.7), two of the best performers in October, each saw a notable loss of growth momentum, as was also the case for both the West Midlands and East of England (both 50.5).

Three regions saw a decrease in activity in November. The North East (46.6) - which saw output fall for the third month running and at a quicker pace - was joined in contraction by London (48.3) and the South West (49.1). In both cases, it was the first fall in output since July 2016 - the month immediately after the EU referendum.
Demand
There were also contrasting trends across UK regions in terms of new business. While the top four ranked regions for new order growth - the East Midlands, North West, South East and Yorkshire & Humber - all saw faster rises, the remainder (excepting the West Midlands) recorded either slower growth or outright falls in new orders. For London and the South West, the decreases were the first since July 2016.

Capacity
Latest data showed decreases in outstanding business across all monitored regions. Companies in the North East recorded the steepest reduction, as has been the case in each month throughout the past one-and-a-half years, followed by those in Scotland. The fall in the East Midlands was negligible, though it nevertheless ended a record run of growth in backlogs in the region that began in February 2017.

The North West was the top performing region for employment growth in November, having seen job creation re-accelerate to the second-quickest since February. Wales, which was ranked second overall, also enjoyed a pick-up in the pace of hiring, to the quickest in over a year. The North East saw the only decrease in private sector employment, though the rate of decline was the slowest since August.

Prices
The rate of input price inflation slowed in all 12 monitored regions in November. Nevertheless, cost pressures generally remained elevated by historical standards, with businesses operating in the North East seeing the steepest monthly increase for the third time in as many months. At the other end of the scale, Welsh businesses recorded the least marked rise in costs, with the rate of input price inflation at a 28-month low.

November saw a broad-based increase in prices charged for goods and services, led by a steep (albeit slightly slower) monthly rise in Northern Ireland. There were also sharp increases across Yorkshire & Humber and the North East, where rates of inflation accelerated to the highest for 11 and eight months respectively. London again saw the slowest increase, with firms in the capital raising charges only slightly.
Outlook
Firms in Yorkshire & Humber maintained the highest optimism towards future output, despite business confidence in the region having softened to a 28-month low. Sentiment in fact moderated across most regions. One of the exceptions was Northern Ireland where, despite expectations having rebounded from October's recent low, the degree of optimism was still the weakest overall.

Sebastian Burnside, NatWest Chief Economist, commented:

'The picture for the overall UK economy in November was one of slower growth, and the latest NatWest Regional PMI data make it possible to dig deeper to unearth not only the areas driving the slowdown, but also those which are showing the most resilience.

'Though there were a number of regions where November data indicated a drop in economic performance, the one that perhaps stood out most was London, where activity fell for the first time since the wake of the EU referendum. Here, and in most other regions, heightened uncertainty among clients was reportedly acting to undermine demand.

'Only a handful of regions bucked the general slowdown in November, the most notable of these being the East Midlands, where businesses reported stronger demand for goods and services leading to an acceleration in output growth. However, it must be noted that, even for those regions that defied the broader slowdown, the pace of expansion was down on the highs seen early in the year.

'Business confidence has also fallen across the board in recent months, with firms up and down the country reporting that Brexit uncertainty has clouded the outlook.

'It wasn't all doom and gloom, however: the survey highlighted a re-acceleration in employment growth, particularly in the North West and Wales, and cost pressures were found to have eased across every region.'

Download October's NatWest UK Regional PMI® report here