Fresh drop in demand for South East goods and services at the mid-point of the year

The NatWest South East Growth Tracker indicated a slowdown in activity in June. The headline 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 – posted 49.9 in June, down from 51.6 in May, to signal broadly stable activity. Though falling fractionally below the neutral 50.0 mark, the downturn was the first for seven months. Growth was reportedly curbed by subdued incoming new orders and uncertainty surrounding the general election. Meanwhile, firms that reported a rise in activity mentioned new projects and improved order book volumes.

There was a fresh decline in new business placed at South East private sector firms in June, after the region had recorded four consecutive months of growth. The downturn was the quickest since October 2023 and moderate overall. Some survey members blamed a general slowdown in the market, while others mentioned the impact of the general election.

June survey data revealed a further rise in workforce levels across the South East private sector, thereby continuing the trend of upturns seen since the start of 2024. Job creation was moderate and the joint-fastest for 20 months. Some panellists raised staffing numbers in line with demand, while others linked the expansion to growth plans.

South East firms indicated another sharp rise in input prices in June. According to anecdotal evidence, firms blamed labour expenses and elevated costs due to supply chain disruption. The rate of input price inflation eased for the second month in a row, to the lowest since the start of 2021 and to a level below the historic average.

Catherine van Weenen, Territory Head of Commercial Mid Market at NatWest, said: "The South East experienced a slowdown at the mid-point of the year, as June data confirmed a slight contraction. A fresh drop in new business saw firms rethink their output. That said, activity levels were little unchanged from May following a six-month run of growth. As panel member reports linked the slight downturn in part to general election uncertainty, there were signs that this blip could be short-lived. South East firms accelerated their hiring plans, recording the joint-strongest jobs growth for 20 months. Moreover, compared to the 12 monitored UK areas, the South East placed at the top of the rankings for both employment and optimism."

Performance in relation to UK

The South East ranked near the bottom of the regional rankings for output, with only Wales and Yorkshire & Humber registering faster contractions in activity. Turning to new business, the region underperformed compared to the UK average, where growth was reported.

Though cost pressure remained elevated in June, of the 12 monitored UK areas, the South East registered the softest rise in input prices. Though there were reports of strong wage pressures, the local rate of jobs growth was the most pronounced regionally.

Selling prices charged by private sector firms across the South East were raised again at the end of the quarter, thereby stretching the current run of inflation to just shy of four years. The uptick reflected the passing-through of higher raw material and staff costs to clients. June's rate of charge inflation remained consistent with that of May and elevated compared to the long-run trend. Only the North East posted a sharper increase in charges than that seen locally.

June saw the seasonally adjusted Outstanding Business Index post below the neutral 50.0 mark again, as has been the case for just over a year now. The drop in backlogs of work reportedly reflected reduced new order numbers. The rate of depletion picked up, was solid overall and in line with the UK average.

South East private sector companies remained optimistic when asked about their outlook for future activity in June. Driving confidence was firms' upbeat growth expectations, hopes of an improved economic climate and new product launches. The degree of positive sentiment dipped to the lowest seen this year so far, but was the most upbeat of all 12 monitored UK areas.