Businesses in the South West saw further decline in December, as the coronavirus pandemic continued to dampen customer demand.

Nonetheless, business confidence regarding the year-ahead held close to a record-high on hopes that a vaccine roll-out and easing of public health measures would lead to a strong rebound in economic conditions.

The NatWest South West 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 – edged down from 47.1 in November to 46.9 in December, to extend the current sequence of falling output to three months.

Adjusted for seasonality, the New Business Index signalled a third successive monthly decline in new orders placed with South West private sector firms in December. Panel members often mentioned that customer demand was generally weak due to the ongoing COVID-19 pandemic and subsequent restrictions on trade and travel.

Optimism towards the year-ahead remained historically sharp in December, despite easing from November's record high. Companies in the South West frequently linked positive projections for activity to expectations that customer demand will rebound once the pandemic is under control and trading conditions normalise.

South West private sector firms reported a further fall in staffing levels during December. Though solid, the rate of job shedding eased notably from November and was the softest recorded in the current ten-month sequence of decline. Several monitored companies indicated that employment had declined due to redundancies stemming from the pandemic.

December data revealed a sustained drop in unfinished workloads at South West private sector firms, thereby stretching the current sequence of decline to 26 months. The rate of backlog depletion eased slightly to the weakest for three months, but remained solid overall. Lower amounts of work-in-hand (but not yet completed) were often linked to spare capacity amid muted sales and efforts to improve efficiency.

South West private sector firms signalled a sharp and accelerated rise in average input prices during December. Moreover, the rate of inflation was the steepest recorded since late-2018 and exceeded the long-run series average. Supplier price hikes, often attributed to stock shortages, as well as increased staffing costs were linked to the latest upturn in operating expenses.

Although input costs continued to rise, prices charged by private sector firms in the South West fell for the third time in the past four months in December. Though modest, the rate of discounting was the quickest since May. Anecdotal evidence suggested that a number of businesses cut their selling prices in order to attract customers and secure sales.

The drop contrasted with the UK-wide trend, which pointed to a slight increase in output charges at the end of the year.

Paul Edwards, chair of NatWest South West Regional Board, said: “Businesses across the South West had a tough end to 2020, and saw further declines in both new orders and activity.

"The pandemic continued to heavily weigh on performance, with clients often cancelling or delaying orders due to uncertainty over the trajectory of the virus and restrictions to contain it.

"On a more positive note, the roll-out of vaccines and the prospect of an end to the public health crisis meant that business confidence held close to November's record high.

"However, the path to recovery is likely to be prolonged, as rising virus cases and a renewed national lockdown will cause further disruption to business operations and weaken spending.”