The reintroduction of national lockdown measures weighed heavily on the performance of South West private sector firms in January, according to latest PMI data.

Business activity and new work both contracted at the steepest rate for eight months, as the resurgence of the coronavirus disease 2019 (COVID-19) pandemic often led clients to delay projects. As a result, firms continued to cut their staffing levels, while disruption to supply chains drove a further marked rise in costs.

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 – dropped from 46.9 in December to 38.5 in January, to signal a sharp and accelerated decline in output. Notably, the rate of contraction was the steepest since May 2020 and quicker than the UK average.

The amount of new business received by South West private sector companies fell for the fourth month running in January. Notably, the rate of contraction accelerated to the fastest since last May and was substantial. The decline was also quicker than that seen at the UK level. Companies that registered reduced new business widely commented on the reintroduction of stricter lockdown measures to curb the spread of the COVID-19 virus.

Although private sector firms in the South West generally expect output to rise over the next year, the degree of optimism weakened for the second month running. The level of positive sentiment was the lowest recorded since last April. Business confidence in the region was also weaker than the national trend. While many companies anticipate activity levels to rise once the pandemic is under control and business operations normalise, there were concerns around how long this might take, given the resurgence in virus cases.

Employment across the South West private sector fell in January, thereby stretching the current sequence of job cuts to 11 months. The rate of decline quickened slightly and was solid, albeit not as severe as that seen across the UK as a whole. A number of monitored firms mentioned that payrolls had fallen as a result of redundancies stemming from the weaker business environment.

As has been the case since November 2018, outstanding business at South West private sector companies declined during January. That said, the rate of backlog depletion was the softest seen since March 2019 and modest. Reports from panellists indicated that lower sales had created spare capacity and enabled businesses to reduce the level of work-in-hand (but not yet completed).

At the UK level, unfinished work also fell in January, and at a steeper rate than seen in the South West.

After reaching a 26-month high in December, the rate of input cost inflation across the South West private sector eased in January. Nonetheless, the rate of increase remained sharp overall and above the long-run series trend. Higher expenses were often linked to greater transportation and raw material costs.

A softer, but still marked, increase in cost burdens was also recorded at the UK level at the start of 2021. However, the upturn remained slower than that seen across the South West.

Average selling prices set by South West private sector firms rose for the second time in the past three months in January. Businesses that raised their output charges indicated that this was due to the pass through of higher input costs to customers. That said, the rate of inflation was only marginal and weaker than that seen across the UK as a whole. Some firms stated that pricing power was limited due to efforts to attract new business.

Paul Edwards, Chair, NatWest South West Regional Board, commented: “Business activity across the South West fell at an accelerated pace in January due to the reintroduction of stricter lockdown measures and business closures.

"Although the rate of decline was not quite as severe as those seen last spring, the data still add to expectations of a weak Q1 performance as the country seeks to curb the spread of the virus.

"Uncertainty over when restrictions can start to be eased meanwhile weighed on business confidence, which slipped to a nine-month low, though the ongoing vaccine rollout is a source of optimism.

"On the prices front, there was evidence of a further squeeze on operating margins, as sharply rising costs contrasted with only a slight increase in selling prices, as firms seek to attract and secure new work."