13 Jun 2022
Inflationary pressures weigh on regional economic growth in May
Firms across the UK reported a rapid rise in average prices charged for goods and services in May, latest Regional PMI® data from NatWest showed.
- Firms across the UK hike output prices amid rampant cost pressures
- Nine out of 12 regions record slower growth in output...
- ...while the North East, Northern Ireland and West Midlands post declines
Firms across the UK reported a rapid rise in average prices charged for goods and services in May, latest Regional PMI® data from NatWest [PDF 318KB] showed, with nearly half of the areas monitored by the survey seeing record output price inflation amid a continued surge in cost pressures. Sharply rising prices in turn acted as a headwind to demand and weighed on regional economic growth.
The PMI Business Activity Index is the first fact-based indicator of regional economic health published each month, tracking the monthly change in the output of goods and services across the private sector. A reading above 50 signals growth, and the further above the 50 level the faster the expansion signalled.
Nine out of the 12 monitored areas recorded a weaker rise in business activity in May, whilst the West Midlands (index at 49.7), Northern Ireland* (49.0) and the North East (48.4) each registered declines. London (56.5) once again topped the rankings in terms of output growth, ahead of Wales (56.1) and Scotland (55.9).
Sebastian Burnside, NatWest Chief Economist, commented:
"May’s Regional PMI surveys highlight sharp – and in some cases even intensifying – inflationary pressures across the UK. We’re seeing businesses in all areas raising prices charged for goods and services at rates that are either at or very close to record highs as they continue to grapple with rapidly ballooning costs, all of which is further adding to the UK’s cost of living crisis.
“These strong price pressures come at a time when the post-lockdown rebound in the economy is fading. Unsurprisingly, we’ve seen a loss of momentum across the UK in terms of business activity, with nine out of the 12 regions covered by the survey seeing growth slow, and the remaining three registering modest declines in output.
“Although rates of job creation have generally cooled in recent months, firms’ willingness to take on additional staff is one area that continues to show resilience, with all regions recording higher employment in May. London once again topped the regional rankings for employment growth, whilst also continuing to see the strongest growth in business activity. However, other areas already look to be in the grip of ‘stagflation’, seeing prices rising sharply whilst activity slows.”
Although nine out of the 12 monitored regions recorded higher inflows of new orders in May, this was the lowest number since February 2021 and, of these, six saw slower growth. The three areas to register outright decreases in new business were Northern Ireland, the North East and East Midlands. London and Wales recorded the strongest increases, with both also seeing slightly faster rates of expansion.
In May, half of the 12 monitored regions posted record increases in firms' input prices. Among the remaining six areas, rates of cost inflation were also elevated and faster than at any time prior to October last year. Businesses in Wales faced the steepest overall rise in operating expenses, while those in Scotland reported the slowest increase (albeit one that was still sharp overall).
With firms generally looking to pass on at least part of the burden of higher costs to clients, all monitored areas saw sharp increases in average prices charged for goods and services in May. Northern Ireland once again recorded the steepest increase, with the rate of inflation here accelerating to a fresh survey high. This was also the case for Wales, the North East, East Midlands and London.
London led a broad-based rise in employment in May. The rate of job creation in the capital even ticked up slightly, as was the case in four other areas (the South East, West Midlands, Scotland and Northern Ireland). The North East remained at the bottom of the rankings, although it did see a fractional increase in workforce numbers, following a decline in April.
Three-quarters of UK regions saw a rise in outstanding business (i.e. orders received by not yet completed) in May. The South West recorded the strongest rate of backlog accumulation, followed by the Scotland and Northern Ireland. At the other end of the scale, firms in the North East registered the steepest drop in work-in-hand, with the East of England and Wales posting more modest declines by comparison.
Firms in Yorkshire & Humber recorded the strongest optimism towards future activity. Here, business confidence recovered somewhat since April, as was also the case for the North West, which ranked second overall. Seven of the 12 monitored areas saw a decline in expectations, however, including Northern Ireland where sentiment turned negative for the first time since October 2020.
* PMI survey coverage in Northern Ireland includes construction and retail, as well as manufacturing and services