Output in Wales returns to expansion but demand conditions remain subdued in August

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 50.5 in August, up from 49.5 in July, to signal a renewed rise in output at Welsh private sector firms. 

The increase in activity was the first since April, albeit only fractional overall. Welsh companies saw the quickest uptick in output of the 12 monitored UK areas. Nonetheless, demand conditions remained muted overall, with growth in activity linked in part to the processing of incomplete work.

New orders at Welsh private sector firms decreased for the third successive month during August. The fall in new business was often linked to subdued client demand following higher interest rates and the strain of inflationary pressures on customer spending. The decline was driven by service providers, as manufacturing firms saw broadly unchanged new orders on the month.

The rate of contraction eased from July, however, and was slower than the UK average.

Welsh firms remained generally optimistic in their outlook regarding future output in August. Confidence was pinned on new product launches and a diversification of service lines due to economic uncertainty. The level of positive sentiment slipped to the lowest in 2023 so far, however, and was weaker than the UK average.

Manufacturers were far more optimistic of a rise in output over the coming year than their service sector counterparts.

August data signalled a renewed drop in employment at Welsh companies, following a marginal expansion in July. The decrease in workforce numbers was only slight, but was the fastest since April and contrasted with the UK trend which indicated a fractional uptick in hiring. Firms noted that lower employment was due to the non-replacement of voluntary leavers.

Of the 12 monitored UK areas, only the East Midlands and the North East registered quicker declines in staffing numbers.

The level of outstanding business at Welsh private sector firms continued to contract in August. The rate of decrease quickened to the steepest since May 2020, and was sharper than both the long-run and UK averages. In fact, Welsh firms saw the fastest fall in incomplete business of the 12 monitored UK areas.

The marked drop in backlogs of work was often linked to lower new order inflows which freed capacity to process unfinished business.

Welsh companies registered a marked rise in input costs during August, with the rate of inflation quickening slightly from that seen in July to the fastest for three months. Higher material and supplier prices were commonly noted as driving inflation. That said, the pace of increase was well below those seen throughout the majority of the last three years and was slower than the series average.

Welsh firms also saw a softer rise in cost burdens compared to the UK as a whole, with only Northern Ireland, Yorkshire & Humber and the North West recording weaker upticks in operating expenses.

Average output charges at Welsh companies continued to increase in August, with the pace of inflation slightly quicker than that seen in July. Greater selling prices were attributed to the need to pass-through higher costs to customers. Nonetheless, the rate of inflation was the second-slowest since April 2021 and softer than the UK trend.

At the sector level, service providers recorded a further but softer uptick in charges, whereas manufacturers continued to register a decrease in output prices.

Kevin Morgan (pictured above), NatWest Wales Regional Board, commented: “August PMI data signalled further difficulties for Welsh firms, as demand remained in the doldrums and output was supported primarily by processing backlogs of work, which fell markedly. If new orders do not increase over the coming months, it is likely that output will once again fall into contraction as backlogs dwindle.

Weaker expectations for the coming year were reflected in a return of retrenchment among Welsh businesses. Job shedding resumed, with employment falling at the quickest pace since April as evidence of spare capacity mounted.”

He added: “Meanwhile, inflationary pressures continued to build, albeit to a lesser degree than has been seen throughout the last three years. Hikes in costs and supplier prices were passed through to customers again, with selling prices rising at a historically elevated pace which is likely to exert further strain on purchasing power at clients.”