The health of the South West private sector continued to strengthen at the start of 2022, with ongoing improvements in demand supporting faster increases in new orders and output. However, shortages of inputs and labour led to a steeper rise in backlogs of work, while cost pressures remained historically sharp.

At 54.0 in January, 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 – rose from December's nine-month low of 52.3 and pointed to a solid rate of output expansion. Though softer than the average seen for 2021 (54.5), the upturn was broadly in line with the UK-wide trend (54.2).

January data pointed to an eleventh successive monthly increase in new orders at South West private sector businesses. The rate of growth quickened from December and was sharp overall. That said, the upturn was slower than that seen on average across the UK.

Reports from panel members indicated that a further recovery from the pandemic, looser COVID-19 restrictions and rising demand across both domestic and external client bases had boosted sales.

Business confidence regarding the one-year outlook for output across the South West improved in January. Expectations of reduced COVID-19 cases and the return to more normal business conditions is anticipated to support output growth over the course of 2022. Furthermore, the overall degree of positive sentiment reached its highest for five months.

At the UK level, optimism towards the business outlook also strengthened at the start of the year, and was slightly above that seen in the South West.

As has been the case since March 2021, South West private sector employment increased during January. The rate of job creation eased slightly since December, but remained much quicker than the series average and sharp overall. Rising staffing levels were generally attributed by panel members to increased client demand and the need to expand capacity. However, there were also reports of difficulties recruiting suitably skilled staff and retaining current workers.

Higher sales, material and staff shortages, and worker absenteeism due to COVID-19 illness led to a further build-up of backlogged work at private sector firms in the South West. Notably, the rate of accumulation was the steepest seen for six months and outpaced the UK-wide average. Outstanding business has now risen in each of the past 10 months.

Adjusted for seasonal variance, the Input Prices Index signalled a further rapid rise in average input costs faced by South West private sector firms in January. This was despite the rate of inflation edging down to a four-month low. Anecdotal evidence linked increased expenses to higher costs for energy, materials, fuel and staff. There were also reports of higher transportation fees.

Across the UK as a whole, the rate of input price inflation accelerated to its second-highest on record and was slightly quicker than that seen in the South West.

Ongoing increases in input costs led businesses in the South West to hike their output prices again at the start of the year as they looked to ease pressure on margins. The rate of inflation was sharp and much quicker than the series average, despite softening to a four-month low.

Output prices also rose markedly across the UK as a whole, with the rate of increase outpacing that seen in the South West for the fifth month in a row.

Paul Edwards, chair of NatWest's South West regional board, said: “The PMI data for January showed that the South West had a strong start to 2022, with firms recording steeper increases in output and new business as the impact of the Omicron wave subsided and customer demand strengthened.

"Companies also expressed greater optimism towards the year-ahead, with confidence regarding future output improving to its highest for five months.

"However, shortages of materials and staff - partly due to illness from COVID-19 - drove a quicker rise in backlogs of work and pushed up expenses further.

"In order to fill vacancies and help boost capacity, companies across the region continued to ramp up their hiring activity, though there were reports that recruitment plans were constrained by skills shortages and greater competition for workers."