Business activity in Wales rises for the first time since February

• Output expands despite further fall in new business
• Employment contracts at faster pace
• Price pressures intensify

The headline NatWest Wales 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 – registered 50.2 at the start of the third quarter, up from 48.4 in June. The latest figure signalled only a fractional rise in business activity, but nonetheless, the first expansion since February. The slight increase in output was reportedly linked to the reopening of businesses and clients, despite customer orders continuing to fall. That said, the rate of growth was much slower than the UK average.

New orders across the Welsh private sector continued to contract in July, albeit at the slowest pace in the current five-month sequence of decline. The decrease in new business contrasted with the trend seen across the UK as a whole, where a solid rise was registered. Wales was only one of two monitored areas to record a fall in client demand, the other being Scotland. Although some firms stated that the partial reopening of businesses helped boost sales, the impact of the pandemic meant customer demand remained weak.

Welsh firms tempered their expectations regarding the outlook for output in July, with the degree of confidence slipping from June’s recent high. Boosting optimism were the reopening of businesses and hopes of a further easing of lockdown restrictions, but some firms were hesitant due to fears of a slow global recovery. The level of positive sentiment was below the UK average, and among the weakest of the 12 monitored UK areas.

Welsh private sector firms indicated a marked reduction in workforce numbers in July, with the rate of decline accelerating from June. Although slower than the records seen in April and May, the pace of job shedding was much faster than the series average. The drop in staffing numbers was commonly attributed to redundancies and the non-replacement of voluntary leavers following muted client demand. The decrease was also sharper than the UK average.

July data indicated a faster contraction in the level of outstanding business at Welsh private sector firms. The pace of reduction quickened slightly from June as weak new order inflows led to further evidence of spare capacity. The rate of backlog depletion was the sharpest of the 12 monitored UK areas.

Average cost burdens faced by Welsh private sector firms rose at a marked pace in July, with the rate of inflation accelerating to a five-month high. Higher costs were often linked to greater prices for raw materials and fuel following supplier hikes. Moreover, Welsh companies registered the fastest rise in cost burdens of the 12 monitored UK regions.

July data signalled a second successive monthly increase in output charges at Welsh private sector firms, with the rate of inflation quickening to a marginal pace. Firms stated that higher output prices were largely linked to the pass-through of greater costs to clients. Some also increased selling prices due to the additional need for COVID-19 safety practices. Although only slight overall, the rate of increase was quicker than the average seen across the UK as a whole.

Kevin Morgan, NatWest Wales Regional Board, commented:

The Welsh private sector saw a rise in business activity for the first time in five months in July, as client demand gradually strengthens. Although still indicating a contraction, the decline in new orders was the slowest since February. That said, Wales was one of only two monitored UK areas to register a reduction in new work, alongside Scotland, which has also seen an extended lockdown period. Meanwhile, job losses continued to mount, with companies still trying to find their feet after the easing of some lockdown restrictions and others either closed or still operating at reduced capacity.

“On the price front, input costs rose substantially at the start of the third quarter as supplier price hikes were rolled out. Firms were able to partially pass higher costs on to clients, but some still sought to remain competitive and boost sales.”