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Business activity contracts markedly in Wales, despite speed of decline easing

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 32.7 in May, up from April’s record low of 16.3.

Nevertheless, the decrease in private sector activity was the second-sharpest in the series history as client demand remained subdued.

Welsh private sector firms registered a third successive monthly decrease in new orders in May. The rate of contraction eased from that seen in April, but was the second-sharpest since January 2009. The downturn was widely linked to lockdown measures following the outbreak of COVID-19, with companies struggling to reopen due to social distancing measures. That said, the pace of decline was the second-slowest of the 12 monitored UK areas, behind the East Midlands.

May data signalled a slight moderation in firms’ expectations towards the outlook for output over the coming year. The degree of optimism was just below the long-run series average, but remained above that seen across the UK as a whole. Confidence was linked to hopes of an uptick in client demand following the easing of restrictions, but some firms continued to highlight concerns about how long any recovery may take.

Welsh private sector firms continued to signal a decrease in staffing levels in May, thereby extending the current sequence of job shedding to three months, spanning the lockdown period. The rate of reduction in employment was among the strongest of the 12 monitored UK areas, slower than only the West Midlands and Yorkshire & Humber. Although some firms noted the use of furlough schemes, other stated that excess capacity had led to job cuts. At the sector level, service providers indicated the faster decline in workforce numbers.

Private sector firms across Wales registered a tenth consecutive decrease in the level of outstanding business. Although the rate of contraction eased from April’s recent low, it was the second-sharpest since March 2009. That said, the pace of reduction was slower than the UK average, and quicker than only the North West. The depletion of incomplete business was commonly attributed to lower new business inflows.

May data indicated a renewed increase in input prices faced by Welsh private sector firms. The rate of inflation was only marginal, but the area was only one of two across the UK to register a rise, alongside Northern Ireland. Higher costs were commonly linked to greater supplier costs following difficulties sourcing materials and inputs. At the sub-sector level, manufacturers recorded the sharper increase in cost burdens.

Output charges across the Welsh private sector fell for the second month running in May, albeit only marginally overall. The decrease was softer than that seen at the UK level. Firms continued to reduce their charges in an effort to boost new sales. Lower selling prices were driven by service providers, with manufacturers registering an increase.

Credit: NatWest

Kevin Morgan, NatWest Wales Regional Board, commented:

“The Welsh private sector continued to be hampered by ongoing lockdown measures in May. With the exception of April’s record low, the rate of decline was the sharpest in the series history, as manufacturers and service providers alike struggled to boost sales. Many continued to lower selling prices despite an uptick in cost burdens, in an effort to bolster demand.

“As a result, employment fell at a steep pace as greater excess capacity emerged following another stark monthly drop in new business. Expectations moderated, as fears of a lengthy recovery weighed on firms’ minds. Whilst expectations moderated they remained above that seen across the UK as a whole, but fears of a lengthy recovery weighed on firms’ minds.”