Flat growth for South West businesses as pressures mount
The latest NatWest Growth Tracker data indicated that business activity across the South West private sector was broadly unchanged in May amid muted demand conditions. At 49.9, the headline South West Business Activity Index – a seasonally adjusted index which measures changes in the region’s output of goods and services – fell fractionally from 50.1 in April, but held close to the neutral 50.0 level to signal little change in output levels across the region for the second successive month.
New orders fell for the third month in a row, albeit only slightly, as inflationary pressures remained elevated. Notably, input costs continued to rise rapidly which, when combined with uncertainty over the economic outlook, led business confidence to slip to its lowest in over a year.
Faye Long, Chair of the NatWest South West Regional Board, said, “Companies across the South West continued to feel the squeeze from sharply rising costs in May, which were linked in part to the Middle East conflict and uncertainty over the outlook. These factors are making clients more hesitant to commit to sales, dampening business activity across the region, which has broadly flatlined over the past two months.
“Nevertheless, it was encouraging to see that the downturn in sales eased again in May and was only marginal.
“Like the rest of the UK, the region faces a challenging situation of rapidly rising expenses and subdued customer demand, making it hard for firms to pass on these extra costs in full to clients and therefore placing a greater strain on their margins. It is therefore not surprising to see business confidence around future output dip in May to its lowest in 13 months, and that firms were less willing to take on additional staff.
“A recovery of output and demand will hinge on more stable business conditions, which will be heavily influenced by developments in the Middle East.”
Private sector firms across the South West reported a third successive monthly reduction in demand for their goods and services in May. That said, the rate of decline eased to a marginal pace that was the weakest over the aforementioned period. While some companies noted that rising prices and economic uncertainty had dampened new order intakes, others suggested that greater marketing and sales efforts and new client wins had helped to lift new business.
The decline in the South West was broadly in line with the trend seen across the UK as a whole.
Looking towards the next 12 months,South West companies were optimistic of growth in activity. That said, the level of positive sentiment fell to its lowest since April 2025 and was weaker than that seen for the UK overall. While a recovery in economic conditions, new projects and expansion into new markets was predicted to support growth, some firms expressed concerns over inflation and ongoing geopolitical uncertainty.
After a slight increase in April, staffing levels across South West private sector firms fell in May. Employment has now declined in 18 of the past 19 months, though the latest reduction was only fractional. Some monitored companies mentioned downwardly adjusting their headcounts due to lower intakes of new work.
Meanwhile, staffing levels fell solidly across the UK as a whole.
Signs of spare capacity were evident by a further reduction in the level of work-in-hand (but not completed) at South West private sector companies in May. Firms often noted that they had sufficient capacity to process backlogs due to subdued demand conditions. Notably, the rate of depletion was the most pronounced in six months and solid overall. The reduction was also slightly faster than that observed for the average UK firm.
South West businesses reported a further rise in average input costs in May, with the rate of inflation cooling only slightly from the 45-month record seen in April. The rapid rise in expenses was linked to supplier price hikes for a number of inputs, often due to the conflict in the Middle East, with higher costs for energy, metals, fuel, plastics and chemicals noted in particular.
Nevertheless, the rate of inflation was not quite as sharp as that seen at the UK level.
As part of efforts to ease pressure on operating margins, firms across the South West raised their selling prices again in May. Although the rate of charge inflation also slowed since April, it was the second-sharpest recorded since February 2023.
On a regional basis, however, only Scotland recorded a softer rise in selling prices than that seen in the South West.
Pictured above: The Clifton Suspension Bridge, Bristol (Image: Pixabay)
