Robust private sector expansion

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The south west economy continued to expand in July, with private sector growth for the third month running according to figures from the latest Markit South West PMI survey.

New order levels increased robustly, with output rising markedly to accommodate the volume of new orders.

However, economic recovery was still in its early stages, with job cuts remaining heavy. Spare capacity persisted in the region, as backlogs continued to be depleted, and companies were forced to offer price discounts to stimulate demand. The headline seasonally adjusted Business Activity Index – which measures the combined output of the region’s manufacturing and service sectors – posted 56.8 in July, from 53.8 in June.

Growth of new business continued in the South West during July, extending the period of sustained expansion to three months. Moreover, the rate at which new orders increased was higher than in the wider UK economy, and was only outpaced by two other regions. Growth was stronger in the service sector, with some firms attributing the rise to improved client confidence.

Despite increased order levels, the volume of outstanding business within the south west private sector continued to decline, extending the current period of sustained reduction in backlogs to twenty-three months. Higher efficiency was partially reasonable, as was excess capacity following the sharp falls in new orders at the turn of the year.

Therefore, employment levels continued to fall, as firms responded to spare capacity within the region. The rate at which jobs were cut remained largely unchanged from that posted in June.

Operating conditions remained tough for private sector companies in the south west during July. Increasing input costs, which have been more prevalent than in the wider UK economy in recent months, continued to rise.

Output prices, however, were reduced for the fifth consecutive month. Higher costs and lower turnover appear to have been recorded in both the service and manufacturing sectors. Panellists from within the service sector noted that high utility prices were impacting costs, although to maintain competitiveness, they were unable to pass these through to clients.

Commenting on the survey, Sarah Ledger, economist at Markit, said: “The South West continued to grow in July, recording its third month of expansion. Moreover, the region carried on growing faster than the wider UK economy. However, employment levels are not yet showing any signs of recovery, with job losses remaining heavy and spare capacity persisting within the region’s companies. This suggests that it will be a long road to full recovery.”

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