Royal Bank of Scotland : South West PMI® report – September

Companies registered the steepest reduction in activity for close to seven years as new order volumes continued to contract. Fewer sales and efforts to curb costs led firms to trim their headcounts again, while backlogs of work declined sharply. Operating expenses continued to rise markedly, which led to a further increase in selling prices. Looking ahead, companies expressed the weakest degree of optimism towards the one-year business outlook for nine months amid lingering Brexit uncertainty.

The headline South West Business Activity Index - a seasonally adjusted index that measures the combined output of the region's manufacturing and service sectors - fell from 49.3 in August to 48.0 in September, to signal a further reduction in business activity. Furthermore, the latest contraction was the steepest seen since October 2012. Private sector output in the region has now declined in each of the past seven months. At the UK level, business activity fell only slightly.

Driving the latest reduction of output was a further decline in total new business received by South West private sector firms. Although the rate of decrease softened slightly since August, it remained solid and quicker than the UK average. Panel members widely commented that market uncertainty had continued to dampen sales in September.

A lack of incoming new orders enabled firms to reduce the level of outstanding business at their units in September. Furthermore, the rate of backlog depletion quickened to the most marked since March 2013. The reduction also outpaced that seen across the UK as a whole.

Subdued demand conditions and efforts to contain costs drove a further decrease in employment across the South West private sector. That said, the rate of job shedding was only marginal and weaker than the UK-wide trend.

September data pointed to a further sharp rise in operating expenses faced by South West private sector firms. Increased staffing costs and adverse exchange rate movements were linked to the latest rise in cost burdens.

As a result, companies raised their output charges again in September. The rate of inflation was solid and quicker than that seen for the UK as a whole.

The level of optimism towards the one-year outlook for output slipped to a nine-month low in September. Political and economic uncertainty remained key factors weighing on sentiment.

Chris Preston, Chair, NatWest South West Regional Board, commented:

'Companies in the South West had a disappointing end to the third quarter, with the latest NatWest PMI data highlighting the quickest drop in business activity for close to seven years. Lingering uncertainty regarding the UK's exit from the EU and ongoing global trade tensions have been the main factors weighing on client demand and subsequently output across the region, as customers are choosing to delay or cancel their spending until there is more clarity regarding the outlook.'

'The South West is not alone in facing these particularly challenging conditions, as firms across the UK as a whole are also seeing reduced amounts of new work, falling employment and rising operating expenses.'

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