Private Sector Remains in Deep Downturn

North East Private Sector Remains in Deep Downturn in May
Business activity is still in decline, but the pace of contraction is easing, the latest Natwest Business Activity Index has revealed. The North East private sector remained in a deep downturn in May with both output and employment continuing to fall sharply across the region, a survey has revealed.

The latest NatWest North East Business Activity Index has been published showing the steep fall, following record contractions in April.

At 28.9 in May, the index – a seasonally adjusted index that measures the month-on-month change in the combined output of the region’s manufacturing and service sectors – was well below the 50.0 threshold that separates growth from contraction.

The latest reading was an improvement from April’s record low 10.7, however, as the easing of lockdown measures saw more firms resume operations.

The decline in activity in the region continued to be led by the service sector. After a record fall in April, new business at firms in the North East was down again in May, the PMI data from NatWest and IHS Markit shows.

The respective seasonally adjusted index pointed to a much slower rate of decline, though its latest reading was still historically low.

Contrasting with the situation in April, the decline in new business in the North East was slightly slower than the UK average.

For the first time in three months, firms in the North East reported optimism towards the outlook for activity over the coming year.

The Future Activity Index climbed sharply from a record low in April and pointed to a higher degree of business confidence than that seen across the UK as a whole. That said, of the firms expecting growth in activity, many reported having been closed or operating below capacity in recent months.

Firms in the region reported another sharp drop in employment in May and, though easing from April’s survey record, the rate of job losses remained faster than that seen across the UK as a whole.

This was despite widespread uptake of the government’s job retention scheme. Underlying data showed deeps cuts to staff numbers across both the manufacturing and service sectors, with the latter continuing to record the faster rate of decline.

The job losses seen across the region partly reflected efforts by businesses to reduce excess capacity. Orders received during May were well below the number that firms were able to complete, as evidenced by a further sharp reduction in backlogs of work. The rate of decline in the North East was the third-fastest in the UK, slower only than those recorded in Scotland and Northern Ireland.

May saw firms’ input costs fall for the second month in a row.

Moreover, the rate of decline accelerated to the quickest since December 2008 and was the fastest among the 12 regions monitored by the survey. Reduced payroll outlays, low fuel prices and a demand-related slump in the cost of some materials all contributed to the drop in operating expenses, according to anecdotal evidence.

Fierce competition for new work led businesses in the North East to reduce output prices in May.

The data also pointed to a growing number of firms turning to discounting as a way to secure or retain business, with average charges falling to the greatest extent since May 2009. The decline in output prices – which was the most marked among the 12 monitored regions – was led by a sharp drop in charges levied by services firms.

Richard Topliss, chair of the NatWest North Regional Board, said: “With many businesses still closed for much of the month and demand severely restricted both domestically and abroad, the North East private sector – like the rest of the UK – was still firmly in a downturn in May. The consequences are being felt socially as firms continue to cut staff in a bid to remain viable.

“A sharp rebound in output expectations is somewhat good news as it shows firms are starting to gear up for a recovery and will likely mean fewer job losses in the coming months.”

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