Welsh business activity falls for the first time since July 2016

According to the latest NatWest Wales PMI^® data, private sector firms registered the first fall in business activity since July 2016 in October amid a further decrease in new work. Hesitancy among clients reportedly led to a third successive monthly decline in demand, with firms cutting workforce numbers in response. Ongoing Brexit uncertainty was also reflected in a drop in business confidence, with optimism hitting a seven-month low. On the price front, rates of input price and output charge inflation softened, with costs rising at the slowest pace since July 2016.

The headline Wales Business Activity Index – a seasonally adjusted index that measures the combined output of the manufacturing and service sectors – registered 49.3 in October, down from 50.2 in September to signal a marginal contraction in output at the start of the fourth quarter. The latest data indicated the first decline in business activity since mid-2016 as clients remained hesitant to commit to large orders.

Subsequently, private sector firms in Wales noted a third successive monthly decrease in new business in October. The fall in new orders was linked to de-stocking among clients in Europe and ongoing political uncertainty which has impacted client decisions. Although the rate of contraction was only marginal overall and softer than that seen in September, it was slightly faster than the UK average.

Welsh private sector firms registered a sharp decrease in employment in October. Panellists stated that lower client demand led to the non-replacement of voluntary leavers, with firms reducing workforce numbers at the fastest pace for almost eight years.

A drop in pressure on capacity following a further cut in new business allowed firms to process orders in a timely manner. Therefore, backlogs of work fell at the fastest rate since June 2018.

Input prices faced by Welsh private sector firms continued to increase at a sharp rate in October, albeit the softest since July 2016. Where an increase was reported, companies linked this to higher costs for fuel, energy and imported goods.

In turn, firms registered only a marginal increase in output charges at the start of the fourth quarter. Companies reported partly passing on costs to clients, albeit at the slowest rate for four months amid a weaker pace of input price inflation.

Finally, business confidence dipped to a seven-month low in October amid ongoing Brexit uncertainty and hesitancy among clients in placing orders. Optimism was one of the lowest across the 12 monitored UK areas, stronger than only Scotland and Northern Ireland.

Kevin Morgan, NatWest Wales Regional Board, commented:

“Business activity dipped into contraction for the first time since July 2016 in October, with new work falling further during the month. Driving the drop in demand was greater hesitancy among clients to place orders amid ongoing Brexit uncertainty.

“Consequently, firms expressed greater caution towards hiring and output expectations. Employment fell at the fastest rate for almost eight years as companies did not replace voluntary leavers amid a reduction in new business. Political uncertainty and the resulting tentative spending activity of customers were highlighted as key factors behind the lowest degree of confidence in output growth over the coming 12 months since March.”