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Economic analysis

Inflation straining demand across a number of UK regions

Latest Regional PMI® data from NatWest showed signs of a broadening slowdown in demand for goods and services due in part to high inflation.

  • Nine out of 12 regions record reduced inflows of new business in July
  • London maintains its recent outperformance
  • Business costs and output prices rise sharply, but rates of inflation slow

 

The number of UK regions reporting growth in business activity fell to its lowest since February 2021 in July, amid signs of a broadening slowdown in demand for goods and services due in part to high inflation, the latest Regional PMI® data from NatWest (PDF 251KB) showed.

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.

Eight of the 12 monitored UK regions recorded higher business activity in July, the fewest since February 2021 (four). London (index at 58.0) saw by far the strongest expansion, but even here the rate of expansion slowed, as was the case in six other areas. These included the West Midlands (50.3) and Scotland (50.2) where growth came close to stalling. Northern Ireland* (41.9) remained at the bottom of the rankings, while lower output was also seen in the North East (45.3), East of England (46.8) and East Midlands (48.7).

 

Sebastian Burnside, NatWest Chief Economist, commented:

"The effects of high inflation and heightened levels of uncertainty are starting to be seen across more and more parts of the UK, with three-quarters of regions recording lower inflows of new business in July as the cost-of-living crisis continues to weigh on demand for goods and services.

"Growth is being constrained as a result, with the number of regions reporting higher activity (nine) falling to its lowest since February 2021 (four). Moreover, even in areas where output rose during the month, growth generally slowed and was, in some cases, reliant on backlogs of work built up earlier in the year.

"Of the 12 UK regions covered by the PMI surveys, London was the best performer heading into the second half of the year, recording the strongest growth in activity and ranking behind only the South East for job creation.  

"Business confidence has taken a hit since Russia's invasion in Ukraine and the ensuing surge in energy and commodity prices, and although there was an improvement in some areas in July, growth expectations generally remained subdued by historical standards.

"Businesses have started to slow the rate at which they increase prices charged for goods and services as demand weakens. Even so, inflationary pressures remain uncomfortably high across the UK."

 

Demand

July's survey highlighted growing signs of weakness in demand, with nine out of the 12 monitored regions recording lower intakes of new business in July – the most since February 2021. Northern Ireland registered the steepest decline, followed by the North East. Growth in new work was confined to just London, the South East and Wales, with each seeing slightly faster increases than the month before.   

 

Prices

Whilst remaining elevated, rates of input price inflation faced by businesses eased across every monitored region in July. Northern Ireland topped the rankings but recorded its slowest rise in operating costs for 15 months. The most marked falls in input price inflation were recorded in the North East, Yorkshire & Humber and West Midlands, the last of which saw the weakest overall rise in costs.   

July saw a broad-based slowdown in rates of output price inflation, albeit from historically high levels the month before. Northern Ireland recorded the steepest overall rise in output prices, despite seeing the greatest deceleration in the rate of inflation. Firms in the East of England reported the slowest overall rise in charges, though even here the rate of increase was still well above the series long-run average.

 

Capacity

Rates of job creation generally remained robust across the UK in July. In fact, four regions even saw slightly faster increases in employment than the month before, including the South East which moved to the top of the rankings. The North East once again went against the broader trend, registering another marginal decline in workforce numbers, its third in the past four months.

The number of regions reporting a decline in backlogs of work rose from seven (out of 12) in June to nine in July, as pressure on business capacity continued to ease in most parts of the UK. London was one exception, registering a further solid rise in outstanding business, alongside the West Midlands and East Midlands. The steepest fall in work-in-hand was in Northern Ireland.

 

Outlook

Firms’ expectations for future activity remained positive for the most part in July, with only those in Northern Ireland anticipating a decline in output over the next 12 months. Businesses in Yorkshire & Humber were the most optimistic about the outlook, despite confidence in the region have weakened from the previous month. Expectations also fell in the West Midlands, South East, East Midlands and South West.

 

Click here to download the latest NatWest Regional PMI®  Report (PDF 251KB)

 

* PMI survey coverage in Northern Ireland includes construction and retail, as well as manufacturing and services.

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