Omicron variant brings business growth in South West to nine-month low

The emergence of the Omicron variant brought business activity growth in the South West to a nine-month low.

The latest regional PMI® data from NatWest highlighted softer increases in business activity and new work across the South West at the end of 2021, with a number of firms linking the slowdown to the emergence of the Omicron variant and increased hesitancy among clients to spend.

At the same time, efforts to support company expansion plans drove the quickest rise in employment for four months, which led to a softer increase in backlogs of work. Prices data showed the rate of input cost inflation slowed from November’s all-time record, but remained rapid, while firms continued to raise their prices charged.

The headline NatWest South West 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 – fell from 54.6 in November to 52.3 in December, to signal a modest increase in output. Notably, it marked the softest rate of expansion for nine months, with growth also weaker than the UK-wide trend.

Private sector companies based in the South West registered a further increase in total sales during December, thereby stretching the current sequence of expansion to ten months. Though solid and quicker than the long-run average, the rate of growth eased notably on the month and was the slowest recorded since September. New business rose at a similarly strong, albeit softer, pace across the UK as a whole.

Companies often mentioned that improved customer demand and new product ranges had boosted new work. However, a number of firms cited that the Omicron virus variant had weighed on client spending and tourism.

Although the Future Activity Index remained above the neutral 50.0 level and continued to signal robust optimism towards the year-ahead outlook for activity, the overall degree of optimism slipped for the fourth month in a row. Notably, the level of positive sentiment was the lowest seen since January 2021. Uncertainty over the pandemic and supplier shortages were key factors weighing on business confidence.

December survey data signalled a further increase in private sector employment across the South West at the end of the year. Notably, the rate of job creation was the sharpest seen for four months and slightly quicker than the UK-wide trend.

Where higher staffing levels were reported, it was generally attributed to efforts to expand capacity and forecasts of rising sales in the months ahead.

The seasonally adjusted Outstanding Business Index signalled a ninth successive monthly rise in unfinished work at South West private sector firms in December. The rate of accumulation was solid, despite softening from November, and quicker than that seen across the UK private sector as a whole.

Reports from panel members suggested that shortages of inputs and staff had impacted how quickly firms could process and fulfil sales.

Average input prices faced by South West private sector firms increased for the nineteenth month running in December. Although easing from November’s record, the rate of inflation remained rapid and among the steepest in the survey history. The rate of increase also remained stronger than that seen at the national level. Higher cost burdens were frequently linked to greater raw material, transport, fuel and staffing costs.

Against a backdrop of rapidly rising costs, private sector firms in the South West increased their selling prices again at the end of 2021. The rate of inflation was the softest seen for three months and slower than the UK-wide trend, but remained sharp overall. Companies that raised their fees attributed this to the pass-through of higher input costs to clients.

Paul Edwards, chair of the NatWest South West Regional Board, said: “Private sector companies in the South West recorded notably weaker upturns in output and new orders at the end of 2021 as the emergence of the Omicron variant and subsequent uncertainty dampened client spending and tourism across the region. This impacted confidence regarding future output expectations, which slipped to an 11-month low.

“Nevertheless, it was encouraging to see businesses press ahead with plans to expand and improve capacity, with employment rising at the sharpest rate since August.”

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