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Welsh business confidence ticks higher, but output and employment fall at faster rates

Welsh flag (Adobe Stock)

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 48.0 in December, down from 48.5 in November, to signal a modest and quicker drop in output at Welsh businesses. The fall was due to weak client demand, economic uncertainty and a further decrease in new order inflows. The sharper decline in activity in Wales contrasted with the wider UK trend, which indicated a moderate upturn. In fact, Welsh firms recorded the second-fastest drop in output behind the North East of England.

Welsh companies registered a further contraction in new business at the end of 2023, although the rate of decline eased for the second successive month. The continued drop in new orders was linked to subdued demand conditions and customer postponements. The pace of decrease was modest and the slowest since September, though it contrasted with the UK average which indicated a moderate expansion in new business.

Manufacturers and service providers alike in Wales recorded contractions in new orders.

December data signalled an improvement in expectations regarding the outlook for output over the coming year at Welsh firms. The level of optimism reached a five-month high and was stronger than the series average. Companies noted that positive sentiment was due to hopes of a pick up in customer demand, investment in product diversification and facilities, and the acquisition of new clients.

The degree of confidence remained slightly weaker than the UK average, however.

Welsh businesses recorded a fifth consecutive monthly decrease in workforce numbers during December. The rate of job shedding accelerated to the joint-fastest in over three years and was by far the strongest of the 12 monitored UK areas. Weak customer demand led firms to reduce staffing numbers, with redundancies mentioned by panellists.

Employment fell at Welsh manufacturers and service sector firms.

Businesses in Wales indicated another monthly decline in backlogs of work in December. The drop in the level of outstanding business was marked overall and sharper than the UK trend. Firms highlighted that lower new order inflows enabled them to process incomplete work. Nonetheless, the pace of reduction slowed to the weakest in seven months.

Average input costs faced by Welsh firms increased at a quicker pace at the end of 2023. The rise in input prices was attributed to greater raw material and component costs.

Although sharp, the rate of cost inflation was slower than the series average and the trend seen across the UK as a whole. In fact, of the 12 monitored UK areas, only the West Midlands, North East and Northern Ireland recorded slower upticks in operating expenses.

Welsh firms registered a sharper rise in output charges during December, with the rate of inflation picking up to the fastest since August. Anecdotal evidence stated that higher selling prices were due to the pass through of greater costs to customers.

In line with the trend for input costs, the pace of increase in output charges was slower than the UK average, with only Northern Ireland, the North East and the North West recording weaker upticks in selling prices.

Jessica Shipman, Chair, NatWest Cymru Regional Board, commented:

“The final month of the year signalled more upbeat sentiment among Welsh firms regarding activity in 2024 as business expectations were the strongest since July, despite output and new orders continuing to contract. Companies anticipated that more accommodative demand conditions and investment in new products and facilities would drive output in the year ahead.  

“Although the pace of decrease in new business slowed, reduced backlogs of work led to dwindling activity and the joint-fastest drop in employment since October 2020 as business requirements waned further. 

“Meanwhile, rates of inflation remained sticky as input costs and output charges rose at faster paces. Sharper hikes in component and raw material costs were passed through to customers despite a challenging demand environment. Nonetheless, rates of increase were among the weakest in around three years and much slower than the 2023 average as inflationary pressures eased substantially from the start of the year.”