Firms across the South West had a tough end to 2020 with sales down and rising costs.
But the Covid-19 vaccine has prompted optimism for the year ahead, according to the latest PMI data from Natwest.
Private sector companies in the South West saw further declines in both output and new orders in December as the pandemic continued to dampen customer demand.
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Nonetheless, business confidence regarding the year-ahead held close to a record-high on hopes that a vaccine roll-out and easing of public health measures would lead to a strong rebound in economic conditions.
The headline NatWest South West 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 – edged down from 47.1 in November to 46.9 in December, to extend the current sequence of falling output to three months. Though modest, the rate of contraction was the steepest seen since June.
Paul Edwards, Chairman of the NatWest South West Regional Board, said: “Businesses across the South West had a tough end to 2020, and saw further declines in both new orders and activity. The pandemic continued to heavily weigh on performance, with clients often cancelling or delaying orders due to uncertainty over the trajectory of the virus and restrictions to contain it.
“On a more positive note, the roll-out of vaccines and the prospect of an end to the public health crisis meant that business confidence held close to November’s record high. However, the path to recovery is likely to be prolonged, as rising virus cases and a renewed national lockdown will cause further disruption to business operations and weaken spending.”
Adjusted for seasonality, the New Business Index signalled a third successive monthly decline in new orders placed with South West private sector firms in December. Panel members often mentioned that customer demand was generally weak due to the ongoing COVID-19 pandemic and subsequent restrictions on trade and travel. That said, the rate of contraction was the slowest seen over the current period of reduction and only modest.
Across the UK as a whole, new work fell only fractionally.
Optimism towards the year-ahead remained historically sharp in December, despite easing from November’s record high. Companies in the South West frequently linked positive projections for activity to expectations that customer demand will rebound once the pandemic is under control and trading conditions normalise.
At the UK level, sentiment regarding the 12-month outlook for output was little-changed from November, and not quite as strong as that seen in the South West.
South West private sector firms reported a further fall in staffing levels during December. Though solid, the rate of job shedding eased notably from November and was the softest recorded in the current ten-month sequence of decline. Several monitored companies indicated that employment had declined due to redundancies stemming from the pandemic.
At the national level, workforce numbers also fell at a much weaker pace, and one that was slightly softer than seen in the South West.
December data revealed a sustained drop in unfinished workloads at South West private sector firms, thereby stretching the current sequence of decline to 26 months. The rate of backlog depletion eased slightly to the weakest for three months, but remained solid overall. Lower amounts of work-in-hand (but not yet completed) were often linked to spare capacity amid muted sales and efforts to improve efficiency.
The level of outstanding business at the UK level fell for the third month in a row in December, though the rate of reduction remained modest and slower than that in the South West.
South West private sector firms signalled a sharp and accelerated rise in average input prices during December. Moreover, the rate of inflation was the steepest recorded since late-2018 and exceeded the long-run series average. Supplier price hikes, often attributed to stock shortages, as well as increased staffing costs were linked to the latest upturn in operating expenses.
A sharper rise in input prices was also seen across the UK as a whole at the end of 2020. That said, the rate of inflation remained below that seen in the South West.
Although input costs continued to rise, prices charged by private sector firms in the South West fell for the third time in the past four months in December. Though modest, the rate of discounting was the quickest since May. Anecdotal evidence suggested that a number of businesses cut their selling prices in order to attract customers and secure sales.
The drop contrasted with the UK-wide trend, which pointed to a slight increase in output charges at the end of the year.