Welsh business activity growth accelerates to six-month high

The research found that private sector firms signalled a renewed rise in output and new business in January, with both posting moderate expansions.

The upturn in new orders resulted in a return to employment growth, despite a strong decline in backlogs of work. Business confidence strengthened notably at the start of the year, with the degree of optimism rising to the highest since April 2014. At the same time, firms increased their output charges at a faster rate as input costs continued to rise markedly.

The headline Wales Business Activity Index – a seasonally adjusted index that measures the combined output of the manufacturing and service sectors – registered 52.6 in January, up from 49.3 in December. The modest expansion in business activity was the fastest seen since last July but was slightly slower than the UK average. Firms often attributed the increase in output to greater client demand.

New business also returned to growth in January, bringing to an end a five-month sequence of contraction. The expansion was moderate overall despite being slower than that seen across the UK as a whole. Firms suggested that the increase in new orders was due to stronger client demand and new product launches.

Employment rose at a marginal pace in January, following a six-month sequence of contraction. The rise in workforce numbers was linked to the renewed rise in new business and efforts to reduce backlogs of work. The rate of employment growth was slower than the UK average.

Consequently, the rate of decline in outstanding business quickened to a strong pace that was the fastest seen since June 2018, as greater workforce numbers relieved pressure on capacity.

On the price front, cost burdens faced by Welsh private sector firms rose at a marked pace in January. The increase in input prices was linked to higher raw material costs. The pace of inflation matched that seen in December and was the second-fastest of the 12 monitored UK areas.

Subsequently, the rate of charge inflation picked up at the start of 2020 as firms sought to partially pass on higher costs to clients. The modest pace of increase was slightly slower than the long-run series trend and the UK average.

Finally, business confidence ticked up to the highest since April 2014 at the start of the year. Firms attributed the stronger degree of optimism to hopes of a pick up in client demand and increased marketing efforts. Output expectations were greater than the UK average.

Kevin Morgan, NatWest Wales Regional Board, said: “The beginning of the new year saw a return to business activity growth across the Welsh private sector, with new business also rebounding. Greater client demand spurred firms on to increase their hiring and prompted an upward shift in output expectations. Confidence was boosted further by hopes of an uptick in new sales and proposed increases in marketing initiatives.

“Pressure on margins remained in January, however, as input costs rose markedly for a second-month running. Although the pace of charge inflation quickened, it was below the historical trend as firms struggled to pass on higher costs to clients.”