London continues to lead regional growth in February

London companies reported a sharp increase in output in February, marking another positive month for the capital’s economy.

The headline London 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 – fell from 54.8 in January to 54.0 in February.

Although easing back from a seven-month high, the index signalled a robust expansion in private sector activity midway through the first quarter of 2025.

Surveyed firms commonly noted that rising domestic and foreign sales had driven activity higher in February.

Increased output was achieved despite lower staffing numbers, as capacity levels enabled firms to reduced backlogs of work.

Catherine van Weenen, Territory Head of Commercial Mid Market at NatWest, said: “London maintained its position as the fastest-growing region in the UK in February, with activity levels increasing further in line with a rise in sales. Although some momentum was lost in both metrics, the increase in new business occurred at a time when most regions are experiencing contractions, suggesting that local firms are demonstrating greater resilience to current economic headwinds.

“Cost pressures eased slightly but remained close to the level seen in January, which was a nine-month high. Wage pressures continue to dominate balance sheets, according to surveyed firms, as the impact of upcoming changes to the minimum wage and employer national insurance contributions trickles through the economy, resulting in rising staff costs and vendor prices.

“As a result, many firms are downsizing their workforces to maintain healthy cost balances and tighten capacity. Although demand growth is strong in London, firms have reduced staff at a rate comparable to the nationwide trend, indicating that businesses perceive more risk than reward for the time being.”

Growth in London remained well above the nationwide trend, placing the region at the top of the rankings for the third time in four months. The sharp upturn at the local level contrasted with only a marginal increase in UK activity overall.

London-based firms reported another improvement in new business midway through the first quarter. Sales rose at a moderate pace, extending the growth streak to a year-and-a-half, although this upturn was the slowest since September 2023. While some firms noted success in acquiring new clients, others commented on the cost pressures faced by customers.

For the third month in a row, London and the North East were the only UK regions to experience an expansion in new orders, contrasting with a further contraction at the national level.

In addition to stronger current sales, London businesses expressed confidence in their ability to achieve revenue and customer gains in the coming months, supporting an overall positive outlook for future business activity. However, there were concerns about increasing slack in the economy due to weak growth and foreign policy uncertainty. Sentiment levels in February aligned with the UK trend but were the lowest recorded in just over two years.

Employment levels in the capital dropped for the third consecutive month in February, driven by cost-cutting measures and reduced volumes of outstanding business. The reduction in staffing was the sharpest observed since November 2020 and aligned with the average pace seen for the UK.

However, some firms reported an increase in staffing due to rising sales and positive expectations, which provided a slight counterbalance to reports of other firms lowering expenses.

The decline in employment coincided with a period of backlog depletion. As firms were able to increase their activity to complete projects and take on new work, the volume of unfinished business fell for the third month in a row. The rate of reduction was solid overall and represented the strongest decline recorded in a year-and-a-half, although it remained much softer than the national average.

London businesses saw a further increase in input costs during February. The uptick was sharp, albeit slightly less pronounced than January’s nine-month high.

Survey respondents frequently mentioned that rising staff costs contributed to the overall increase in expenses. Other factors noted included higher costs for IT, energy, and food and beverages.

Increased expenses often led to a rise in output prices over February. Some firms were also eager to raise their charges ahead of uplifts in the minimum wage and employer national insurance contributions, according to reports.

While selling prices rose markedly in February, the pace of inflation eased marginally from the previous survey period. It was also among the slowest rates recorded across the 12 UK regions, with only the North East and Wales showing softer rises.