NatWest’s South East Growth Tracker showed tentative signs of recovery across the South East’s private sector, with declines in output, new orders and employment all losing pace and business sentiment strengthening.
The headline South East Business Activity Index rose from 48.6 in April to 49.4 in May. The reading signalled a marginal contraction in output that was softer than in the previous month.
Where a decrease was reported, panellists commented on subdued sales as a result of weak underlying demand conditions and raised levels of political uncertainty, both domestically and internationally.
Granular data showed that the downturn was concentrated in the manufacturing sector, while the service sector managed to eke out growth.
When asked about their expectations for activity over the coming 12 months, companies in the South East were optimistic. Confidence in the outlook recovered from April’s recent low to its strongest in six months.
In anecdotal evidence, the launch of new products, marketing efforts and general hopes for a pick-up in market conditions were cited as reasons to be optimistic.
Private sector firms across the South East signalled another rise in average cost burdens in May, stretching the current run of inflation to exactly five years.
While increased staff costs was the most frequently cited driver of upward pressure, panellists also noted higher supplier charges and elevated business service costs.
Although still substantial, the rate of input price inflation was softer than in April and less marked than the national average.
Output charges for South East goods and services also increased further in May. According to anecdotal evidence, selling prices were raised to cover increased costs, in particular those related to labour.
The rate of charge inflation dropped to its weakest in six months, but was sharp nonetheless and just stronger than the UK-wide trend.
Sebastian Burnside, NatWest chief economist, said: “Sentiment across the South East private sector economy rebounded in May as firms remained confident that business conditions would improve.
“In particular, new product launches and marketing efforts are expected to bear fruit and drive growth over the next 12 months. Although demand conditions remained subdued, the downturn softened.
“At the same time, activity continued to decline, but the rate of contraction was only marginal and slightly softer than the average seen over 2025 so far.
“Cost pressures remained substantial and a key headwind, but as was the case across all 12 monitored UK areas, the rate of inflation receded in May.
“As elevated business expenses remained closely linked to increased labour costs, this trend bodes well for the local labour market.
“Meanwhile, average selling prices were raised again in an attempt to recover costs. The rate of charge inflation was the softest in six months, however.
“One way in which businesses looked to contain costs was to lower their employment levels. The decrease came amid further reports of excess capacity. The rate of reduction was noticeably softer than in April, however.”
The bigger picture: Performance in relation to the UK
The local decline in activity contrasted with the UK average (50.3), with only the North East, Yorkshire & Humber and the East Midlands posting faster contractions.
Meanwhile, confidence in the outlook for activity improved noticeably and remains elevated compared to the UK average.
The seasonally adjusted New Business Index posted below the crucial 50.0 mark in May. It marked the seventh consecutive monthly decrease in new orders placed for South East goods and services.
According to anecdotal evidence, demand conditions remained subdued partly due to concerns over the domestic and international political environment.
May’s survey data highlighted a ninth consecutive monthly reduction in workforce numbers across the South East.
The decrease reflected the non-replacement of leavers, panellists noted, often a result of cost considerations, partly due to raised National Insurance contributions and the higher National Minimum Wage.
The rate at which employment numbers fell was the joint-weakest in six months and moderate overall. Of the 11 UK areas to record a fall, only the North East and South West saw less marked reductions compared to those seen locally.
Despite efforts to streamline employment, firms were still able to work through their backlogged orders in May. Panellists mentioned that subdued sales had allowed them to keep on top of workloads.
The rate of depletion was substantial and the strongest seen since August 2023. Of the 12 UK areas, only Yorkshire & Humber and the North West made greater inroads into their levels of outstanding business.
