South East output falls marginally and charge inflation continues its descent

Economic growth across the South East stalled in July, according to NatWest PMI data, as firms responded to lower intakes of new business by trimming output.

Input cost inflation ticked higher, but prices charged for goods and services rose at the slowest rate in just under two years. Encouragingly, job creation continued and firms were strongly upbeat towards the outlook.

At 49.6 in July, down from 54.0 in June, the headline NatWest South East PMI 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 — was in sub-50.0 territory for the first time in six months and therefore signalled a contraction in activity.

Adverse sales developments, strikes and elevated interested rates reportedly constrained output. The rate of reduction was, however, only marginal.

Private sector firms in the South East signalled lower intakes of new business in July, ending a six-month sequence of growth. Where a fall was reported, panellists indicated that high interest rates dampened demand and led to delayed investment decisions.

Strikes and the cost-of-living crisis were also cited as factors restricting sales. That said, the overall rate of reduction was only marginal. The rate of decline in new business locally was broadly in line with the UK average.

After retreating to a 28-month low in June, the rate of increase in input costs faced by South East companies quickened in July.

Although historically high, the rate of inflation was the second-slowest over the aforementioned period. Upward pressures stemmed from food, insurance, labour and raw material costs, according to survey participants.

Concurrently, firms noted lower prices for fuel and energy. The South East came fourth in the regional rankings for input cost inflation.

Prices charged for goods and services in the South East rose further in July, with panellists attributing the increase to the need to pass on greater overall expenses to clients. The rate of output price inflation was sharp and above its long-run average, though slipped to its lowest since August 2021.

Efforts to secure new contracts, competition and reduced energy prices curtailed the rise, anecdotal evidence showed. Out of the 12 monitored UK regions and nations, only London recorded a stronger rate of charge inflation than the South East.

Despite faltering demand, companies in the South East continued to take on extra staff in July, extending the current sequence of expansion to four months. According to panel members, job creation stemmed from the filling of existing positions and the hiring of temporary workers to cover staff on long-term sickness absence.

The overall increase in employment was only slight, however, with growth curbed by subdued sales and shortages of skilled candidates. The local uptick in jobs was softer than that seen at the UK level.

July data pointed to an increasing degree of spare capacity among South East firms, evidenced by a faster contraction in outstanding business. The latest decline was the second in successive months and the most pronounced in three years.

Demand weakness, better input availability at suppliers and growing workforce numbers reportedly facilitated a reduction in unfinished business.

The Future Activity Index signalled a mild improvement in the overall degree of optimism at South East companies during July.

Around 56% of survey members predict output growth in the coming 12 months, with advertising and new product releases boosting confidence. Some firms also foresee contained inflation, lower interest rates and an improvement in demand conditions.

The South East registered the second-highest level of confidence out of the 12 monitored UK regions and nations, behind the West Midlands.

Catherine van Weenen of the NatWest London and the South East Regional Board said: “Despite revealing renewed declines in new orders and business activity in July, the South East PMI showed some positive developments such as ongoing hiring growth and improved sentiment among local companies towards the year-ahead outlook for output.

“Also, competitive conditions and efforts to secure new contracts dragged down prices charged inflation to its lowest since August 2021.

“Should inflation continue its descent, there could be a revival in households’ demand for goods and services in the coming months.”

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