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Demand Conditions Improve in March as Inflation Retreats

28th April 2023

Key Findings 

  • South East firms see strongest rise in sales for almost a year
  • Output expands, but recruitment challenges prevent job creation
  • Slower, albeit sharp, increases in input costs and output charges

Economic conditions in the South East continued to strengthen, according to the NatWest PMI®, with data for March showing a faster expansion in new business intakes and back-to-back increases in output. Moreover, business confidence ticked higher and price pressures receded.

Posting 52.3 in March, the headline NatWest South East PMI® 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 — indicated a second successive rise in business activity. That said, falling from 53.3 in February, the latest reading pointed to a slower and moderate rate of expansion. Anecdotal evidence indicated that growth stemmed from higher sales and the clearing of backlogs, but was curbed by shortages of some inputs, staff absences and hiring difficulties.

South East firms signalled a further increase in new work intakes during March, extending the sequence of growth seen since the start of 2023. Moreover, the pace of expansion was solid and the strongest in 11 months. Companies reported an improvement in demand conditions, organic growth and positive outcomes from investment in sales resource. The South East noted the third-quickest upturn in new orders out of the 12 monitored UK regions and nations.

The rate of input cost inflation across the South East softened in March, as has been the case in all but one month since the peak reached in May 2022. Although substantial by historical standards, the latest increase was the weakest in 25 months. Survey participants noted higher advertising, equipment, food, material, utility and wage costs. At the same time, firms signalled reduced price pressure from energy, commodities, natural gas and shipping.

With overall expenses rising further in March, prices charged for South East goods and services continued to increase. Despite slowing to the weakest in 19 months, the overall rate of charge inflation was historically sharp. Indeed, almost a quarter of all survey members (24%) signalled higher selling prices, while 1% noted a reduction. The South East again topped the regional rankings for charge inflation.

After lifting payroll numbers on a monthly basis for two years, South East firms registered broadly unchanged headcounts in March. This was signalled by the respective seasonally adjusted index posting only fractionally below the neutral mark of 50.0. Some companies associated a fall with cost-cutting efforts, hiring challenges and the non-replacement of voluntary leavers. Others attributed growth to recruitment campaigns, efforts to clear backlogs and greater sales volumes.

South East companies continued to make inroads into their backlogs in March, reducing them for the fifth month in succession. Although moderate, the rate of depletion accelerated from February. More stable raw material supply and efforts to deliver delayed orders reportedly underpinned the latest contraction in unfinished business.

There was an improvement in the overall level of positive sentiment among South East companies. The respective index rose to its highest mark in nearly a year and was above its long-run average. Panellists that forecast higher output volumes in the coming 12 months pinned optimism on new product releases, acquisitions, advertising and investment. Some also hope for a better economic climate and a retreat of inflationary pressures.