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Business activity rebounds sharply as demand strengthens

by LLB Finance Reporter
13th Mar 23 7:14 am

The headline NatWest London 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 – rose sharply to 56.0 in February, from 50.5 in January, to indicate a marked and stronger improvement in business activity across the London private sector.

The upturn reflected a similarly robust rise in new business intakes as respondents signalled that demand conditions were starting to improve.

London private sector businesses registered a marked upturn in new order volumes midway through the first quarter of the year. The rate of growth accelerated notably from January and was the strongest seen for nine months. Moreover, the capital outperformed the UK average and recorded the strongest expansion in new orders out of the 12 monitored regions.

At the same time, new orders across the UK as a whole increased for the first time in seven months.

February data indicated a further improvement in confidence levels at London private sector companies, shown by the Future Activity Index rising for the fourth month running. Overall, business expectations were at the highest level for 11 months, but remained broadly in line with the UK trend. Firms often mentioned that new product introductions and expansion into new markets supported optimism that activity will increase over the coming year.

The rise in new orders sparked a further recovery in job levels at London-based firms in February. Employment increased for the second month running, after declining for the first time in 22 months at the end of last year. Though the latest rise in staffing levels was only modest, it was the fastest recorded since October 2022.

Volumes of outstanding business across the London private sector grew for the first time in three months during February, and at a solid pace that was the fastest since last September. While panellists mainly linked the rise in backlogs to higher demand, others commented on staff and input shortages. Notably, the upturn was much sharper than that seen at the UK level.

The rate of increase in input costs across the London private sector economy softened for the third month in succession in February, and was the weakest seen since September 2021. That said, the pace of inflation remained marked by historical standards, with 42% of respondents seeing their costs rise over the month, against 3% that registered a fall. Higher expenses were mainly attributed to a rise in salary costs.

Most notably, the rate of input cost inflation in London was the quickest seen of the 12 monitored regions for the first time since July 2019.

In contrast to the slowing trend for input cost inflation, London businesses raised their output charges at a fractionally quicker pace for the second straight month in February. Companies often cited the need to pass rising wage costs onto their clients and to combat the effects of rapid inflation. However, the increase in charges was slightly softer than the national average.

Catherine Van Weenen,NatWest London and the South East Regional Board said, “The surprisingly marked uplift in business activity during February added to evidence that the capital has begun the year in a much better place than at the end of 2022.

“Higher activity was predominantly linked to a sharp rise in client demand, leading firms to up their forecasts for future activity to an 11-month high. The improvement encouraged another rise in employment which, whilst modest, was the fastest recorded since last October.

“While cost burdens continued to ease, firms again signalled a reluctance to pass this moderation onto customers. In fact, the rate of output price inflation ticked up slightly for the second month running, providing further signals that pressure on consumer prices could remain severe for some time.”

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