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High inflation and uncertainty about the future of the º£½ÇÊÓƵ economy caused business activity in the South West to fall in September, new data shows.

The weaker economic climate also weighed on business confidence for the year ahead, which dropped to its lowest on record last month and led to the first reduction in employment for just over 18 months, the data from NatWest found.

The bank's South West PMI 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 – dropped from 46.2 in August to 43.5 in September. The rate of contraction was the steepest seen since January 2021, and higher than that seen across the º£½ÇÊÓƵ as a whole.

Companies reported increases in costs, as higher payments for energy, wages and raw materials pushed up expenses. This fed through to another sharp rise in selling prices, NatWest said, as firms looked to pass on additional costs to customers as part of efforts to protect operating margins.

Sentiment regarding output levels for the year ahead waned again in September, to hit the lowest level since the series began over a decade ago. While some firms anticipate that greater investment, export opportunities and a recovery in overall demand conditions would support growth, others cited concerns over a weak economic outlook, labour shortages, rising interest rates and the cost-of-living crisis. Expectations in the South West were also much weaker than that seen across the º£½ÇÊÓƵ private sector as a whole.

After rising at the weakest rate for a year-and-a-half in August, employment across the South West private sector declined during September - the first reduction in headcounts since February 2021. Anecdotal evidence suggests the non-replacement of voluntary leavers and redundancies drove the renewed fall in staffing levels.

The South West was only one of two º£½ÇÊÓƵ regions to register lower employment in September, with the North East recording a modest reduction in payrolls.

The amount of unfinished work at South West private sector firms also declined for the third month running. The rate of backlog depletion was little changed from that seen in August and sharp overall. Meanwhile, the rate of input price inflation across the region's private sector softened for the fourth month running to reach its lowest since May 2021.

The NatWest report also said South West companies raised average selling prices for the twenty-first month in a row. Firms that hiked fees often mentioned passing on additional costs to clients via higher selling prices.

Paul Edwards , chair of the NatWest South West Regional Board, said: “Latest PMI data showed that the downturn in private sector activity across the South West gathered pace in September, with firms reporting the steepest falls in output and new orders since January 2021."

He added: "At the same time, companies continued to see rapid increases in costs, as higher payments for energy, wages and raw materials all pushed up expenses. This in turn fed through to another sharp rise in selling prices, as firms looked to pass on additional costs to clients as part of efforts to protect operating margins."