Key Findings

• Output and new business rise at marked, but softer, rates
• Employment contracts at fastest pace of all 12 UK regions
• Firms are more upbeat towards growth prospects

The headline NatWest West Midlands 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 – posted 58.5 in September, thereby signalling growth for the fourth consecutive month. The index was down from 61.9 in August, but was still consistent with a marked rate of expansion.

September data showed a fourth consecutive monthly increase in new business at private sector firms in the West Midlands. Companies that noted growth mentioned targeted marketing, better demand conditions and the reopening of clients' branches amid a relaxation of lockdown restrictions related to the COVID-19 pandemic. Despite softening to a three-month low, the rate of expansion in new business remained marked. Demand for both goods and services improved, with manufacturers leading the rise.

Private sector companies in the West Midlands were strongly confident of a rise in business activity over the course of the coming 12 months. Moreover, the level of positive sentiment rose from August and was slightly above the UK-wide average. Anecdotal evidence suggested that hopes that a vaccine for COVID-19 will be rolled out underpinned confidence. Optimism was signalled by goods producers and service providers.

Employment decreased further at the end of the third quarter, marking an eight-month sequence of contraction. Despite being softer than in August, the rate of reduction was marked. Panellists indicated that redundancies and restructuring policies, stemming from the COVID-19 pandemic, were the main factors leading to lower headcounts. Although payroll numbers declined in each of the 12 monitored UK regions, it was in the West Midlands that the sharpest fall was recorded.

PMI data continued to highlight spare capacity among private sector firms in the West Midlands, as outstanding business volumes declined further during September. The fall in backlogs was the twenty-sixth in consecutive months. The rate of depletion picked up to the quickest since June, but was moderate overall. The trend for the region contrasted with that seen at the UK level, where unfinished work rose for the first time in two years.

As has been the case since July, average cost burdens at West Midlands private sector businesses increased in September. However, the rate of inflation softened from August and was below its long-run average. Those companies that reported higher input prices mentioned that demand for certain materials exceeded supply. Once again, cost inflationary pressures in the region surpassed the UK average.

Prices charged for goods and services in the West Midlands continued to rise in September, thereby stretching the current sequence of inflation to four months. Despite accelerating from August, the rate of increase was modest and lower than that seen for input costs. Among the 12 monitored UK regions, only Wales saw a faster rate of inflation than the West Midlands, while discounting was recorded across five localities.

John Maude, NatWest Midlands & East Regional Board, commented:

“It's encouraging to see that economic conditions in the West Midlands continued to improve in September from the coronavirus-related contractions seen earlier in the year.

"Survey participants indicated that business openings related to easing lockdown restrictions played an important role in the latest results, with firms in the region securing new work as a result and lifting business activity accordingly. Companies also became more optimistic of a rise in output in the coming 12 months, largely reflecting hopes that a vaccine for COVID-19 will be rolled out and that demand will fully recover.

"Worryingly, but unsurprisingly, there was another decline in employment. The fall in payroll numbers was broad-based across the 12 monitored UK regions, though the strongest in the West Midlands. With backlogs data suggesting that there remains spare capacity among panellists, a sustained period of strong new order growth may be required before businesses resume their hiring efforts."