South West private sector firms saw a notably softer, but still solid, increase in business activity midway through the third quarter.

Recovery momentum slowed following the record boosts to output and sales after the initial loosening of COVID-19 restrictions. Nonetheless, business confidence hit a six-month high, which in turn supported a record increase in employment.

At 54.7 in August, the headline 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 – fell from 62.2 in July to signal a sustained upturn in output. Though solid, the rate of expansion eased notably from the previous month, however, and was the softest seen since March. The rate of growth was broadly in line with that seen across the UK a as a whole, however, which also saw a marked slowdown in momentum.

Firms operating in the South West recorded a sharp increase in inflows of new work in August, with businesses often attributing the upturn to the further release of pent-up demand since the loosening of COVID-19 restrictions and increased tourism in the region. That said, the rate of new order growth softened to a five-month low, and was much slower than May's multi-year peak. New business also expanded at a softer rate across the UK as a whole, though growth was stronger than that seen in the South West.

August saw an improvement in business confidence towards activity over the coming year among South West private sector firms. The degree of optimism reached its highest since February and was above the UK average. Upbeat forecasts were often linked to expectations that sales and output will continue to increase over the coming months, and that economic conditions will normalise.

As has been the case since March, staffing levels at South West private sector firms increased during August. Furthermore, the rate of job creation quickened for the fifth month in a row to hit a fresh series record. The South West also recorded the second-fastest expansion of payroll numbers of all 12 UK regions (after London).

Staff hiring was generally linked by panel members to rising sales and expectations of further increases in client demand in the months ahead.

Latest survey data pointed to the softest increase in backlogs of work at South West private sector firms for five months in August. Nonetheless, the rate of accumulation was solid overall and identical to that seen across the UK as a whole.

Supply chain delays and staff shortages were often cited as key factors when explaining the latest upturn in unfinished workloads.

Operating expenses faced by South West private sector businesses rose for the fifteenth consecutive month in August. Moreover, the rate of inflation eased only slightly from July's record high and was rapid overall. The rate of growth also exceeded the UK-wide average.

Increased fuel bills, greater raw material prices and higher staffing costs were all cited as key drivers of inflation. Some survey respondents also mentioned increased transport fees.

Adjusted for seasonal influences, the Prices Charged Index signalled a sustained rise in output charges set by South West private sector firms during August. Despite easing to a four-month low, the rate of increase was sharp overall and outpaced the national trend.

According to anecdotal evidence, firms had raised their selling prices as part of efforts to pass on higher costs to customers.

Paul Edwards, chair, NatWest South West Regional Board, said: “The South West economy continued to post strong growth in August, despite overall output expanding at the softest rate in five months as initial boosts to activity from COVID-19 measures easing faded.

"Nonetheless, companies were the most optimistic since February regarding the 12-month business outlook, and this in turn helped to drive the steepest increase in employment in nearly 25 years of data collection.

"However, ongoing shortages of materials and staff, higher transport fees, and greater fuel bills all led to a further rapid increase in operating expenses."