London Shows resilience despite slipping growth amid business caution and steeper inflation

Business across the capital remained upbeat in March, despite increased challenges.
The headline London 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 57.8 in February to 54.2 in March, signalling a slower increase in private sector activity.
The upturn remained strong by historical standards, with respondents citing continued growth in new work and business investment.
New business volumes rose, although at the weakest rate in eight months, as the war in the Middle East led to delayed client decisions and reduced travel activity. Output expectations also softened, while overall input costs rose at the sharpest pace in over two-and-a-half years.
John Dixon, Co-Head, Corporate Banking London & South East said:
“It was encouraging to see a strong degree of resilience in the London private sector in March. Output and new business intakes continued to expand, albeit at softer rates than in February. Some firms signalled that clients were cautious to commit to new orders amid heightened levels of economic uncertainty, but in general, sales continued to rise and firms were hopeful of a robust increase in activity in the year ahead.
“Local businesses have faced sharp rises in fuel prices and transport costs with total expenses rising at the steepest rate since mid-2023. In turn, companies raised their own prices at a faster pace and continued to lower employment in order to stem the impact on margins. Going forward, these inflationary pressures will be telling of the impact of the Middle East on the capital.”
image002.png
image003.jpg
image005.pngPerformance in relation to UK

Firms across London registered only a moderate rise in intakes of new work at the end of the first quarter. In fact, the rate of growth was the slowest seen in the current eight-month run. A number of businesses commented on client caution, which was mainly associated with the Middle East war. Travel demand was also reported to have declined. However, in other cases, companies saw sales rising and clients moving ahead with projects.
Despite growth softening, the demand environment remained much more favourable in the capital compared to the national trend, as new business across the UK decreased for the first time in six months.
London companies were less upbeat about the outlook for business activity in March. While many firms reported bullish projections for activity and sales, the degree of optimism slipped to a six-month low amid some concerns that global economic conditions will weaken. London firms were more confident than seen on average in the UK.
Local companies made further cuts to their headcounts over the course of March. Despite easing to a three-month low, the rate of reduction in total employment remained solid by historical standards and was the fifteenth decline in the past 16 months.
Firms highlighted both staff redundancies and pauses on replacements, due largely to budget pressures from increased wage costs, as well as some mentions of efficiency gains from automation.
London companies observed a sharp easing of capacity pressures in March, as the pace of growth in backlogs of work fell to a four-month low and was mild overall. Survey panellists signalled that project postponements and difficulties winning new sales had led to a slowdown. That said, the increase in backlogs remained one of the quickest recorded out of the 12 monitored UK regions and nations.
March data signalled a marked uptick in the rate of input cost inflation experienced by London companies. Where an increase in costs was observed, panellists often cited the impact of the Middle East conflict on fuel prices and transportation costs, alongside continued reports of wage growth and higher Natural Insurance payments. Consequently, total input costs rose at the sharpest pace since August 2023. That said, the regional increase was the second-weakest recorded in the UK (ahead of East of England).
Selling prices rose to a greater degree in March, with the respective seasonally adjusted index reaching its highest level in almost a year. Companies reporting price hikes linked this to higher staff costs and fuel surcharges. The mark-up was broadly aligned with the UK trend.