The modest decrease in output was due to weak demand conditions and reduced customer spending following strong inflation, according to panellists.
The downturn in activity was the fastest since last September and quicker than the UK average.
Welsh private sector businesses registered a renewed fall in new orders in the opening month of 2023. The decrease in new business was solid overall and the fastest since last October. The downturn was also quicker than the UK average. Companies noted that lower new business stemmed from weak demand conditions in domestic and external markets, as customers reduced spending following severe inflationary pressures.
Output expectations for the year ahead across the Welsh private sector strengthened during January. The degree of optimism was the highest since July 2022 and above the long-run series average. Hopes for greater output were linked to investment in new product launches and increased marketing, alongside aspirations to acquire new clients.
The level of positive sentiment was only slightly weaker than the UK average.
Welsh private sector firms signalled a return to job shedding in January, as companies cut employment for the first time since April 2021, albeit marginally. The fall in workforce numbers was attributed to lower business requirements following a drop in new orders.
The decrease in employment contrasted with unchanged levels of staff across the UK as a whole.
January data signalled a strong decline in the level of outstanding business across the Welsh private sector. The rate of contraction accelerated to the sharpest since July 2020. The pace of decrease was among the fastest of the 12 monitored UK areas, with only Scotland registering a quicker fall in work-in-hand.
Welsh firms often noted that sufficient capacity and a drop in new business drove the fall in incomplete work.
Average cost burdens across the Welsh private sector increased at a marked rate again at the start of the year. Hikes in input prices were due to higher wage bills, alongside greater material, energy and utility costs. The rate of cost inflation eased to the slowest since April 2021 and was slightly weaker than the UK average, despite being historically elevated.
January data indicated a sharp rise in selling prices at Welsh private sector firms. The rate of charge inflation accelerated for the first time since October 2022 and was much steeper than the long-run average. The increase in output charges was also the quickest of the 12 monitored UK areas. Companies stated that higher selling prices were due to efforts to pass-through rising costs to clients.
Gemma Casey, NatWest ecosystem manager for Wales, said: “Welsh firms signalled a return to contraction territory for output and new business in January, as 2023 got off to a rocky start. Pressure on customer spending from high inflation stymied new sales and indicated a turnaround from that seen at the end of last year. Although cost pressures softened again on the month, firms sought to recoup additional expenses through a sharper rise in selling prices. In fact, output charges rose at the steepest rate across the UK.
“Despite business confidence picking up to a six-month high, Welsh companies were hesitant in their hiring decisions, contributing to a renewed fall in employment. The drop was the first for 21 months, with reduced new orders reportedly leading to ample capacity to process incoming work.”