Business activity is contracting in the West Midlands with new orders increasing only marginally and input costs and output charges rising at near-record rates, according to a new report.
The latest NatWest PMI research for May showed a renewed decline in private sector output across the region.
The PMI is a seasonally adjusted index that measures the month-on-month change in the combined output of the region's manufacturing and service sectors.
The latest scores of 54.5 in April, down to 49.7, pointed to the first contraction in 16 months, NatWest said.
Comments from survey participants highlighted inflationary pressures, subdued demand, challenging economic conditions and input shortages as the main drags on business activity.
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That said, the overall rate of reduction was only marginal, the research stated. As has been the case since the start of 2022, West Midlands companies indicated an increase in new orders during May.
Where growth was signalled, panellists cited better demand conditions and greater international travel however, despite accelerating from April, the rate of expansion remained only marginal and below its long-run average.
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Subdued market confidence, inflationary pressures, the cancellation of projects and input shortages reportedly curbed the upturn.
May data highlighted another monthly increase in input costs facing West Midlands private sector firms.
Moreover, the rate of inflation accelerated to the second-strongest since the series started in January 1997, beaten only by November 2021.
According to panellists, electronic components, energy, food, fuel, transportation and wage costs were the key drivers of price pressures.
Similar to the trend for input costs, output prices rose at a sharp rate that was among the fastest in the series history (since November 1999) during May.
A higher index reading was only seen last month. Around 47 per cent of monitored firms signalled higher fees, citing the pass-through of rising cost burdens to clients. Private sector firms in the West Midlands remained confident of a rise in output over the course of the coming 12 months.
However, overall sentiment slipped to a 19-month low and was below the long-run series average.
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Acute inflationary pressures, issues with transportation, a challenging economic climate and the Russian invasion all reportedly dampened optimism in May.
Backlogs of work rose further in May, thereby stretching the current sequence of accumulation to 15 months. Despite accelerating to the fastest since February, the pace of expansion was only slight.
New contract wins, greater bookings, labour shortages, supply-chain issues and a lack of raw material availability all reportedly caused the latest uptick in unfinished business volumes.
West Midlands companies indicated that hiring activity continued to increase halfway through the second quarter, taking the current sequence of job creation to 15 months.
John Maude, Midlands and east regional managing director at NatWest, said: "Inflation and ensuing budget cuts among households and businesses pushed the West Midlands private sector economy back into contraction during May.
"New work received by local firms rose only marginally and output fell for the first time since January 2021.
"Another worrying sign was seen with regards to business confidence which slipped to the lowest since October 2020 as panellists became increasingly concerned that mounting price pressures, tough economic conditions and the Russian invasion would weigh on output in the year ahead.
"Price indices indicate that inflation is yet to peak, as a sharper upturn in input costs hints at more pronounced increases in charges in the coming months."