Business activity in Northern Ireland contracted for the third consecutive month in July as strong inflationary pressures caused further sharp reductions in output and new orders, according to the latest Ulster Bank Northern Ireland PMI.

Despite showing signs of easing, inflation still remained elevated last month, but employment continued to increase as the headline seasonally adjusted business activity index dropped from 42.9 to 41.9 month-on-month, the sharpest contraction in activity since February 2021.

Retail posted the fastest decline in activity, followed by construction and then manufacturing, and the marked reduction in services activity was the softest of the four broad sectors covered.

Respondents linked decreasing output to the effect of sharply rising prices on demand, with new orders having now fallen for three successive months, and the latest decline the largest registered for a year-and-a-half.

Rates of inflation in both input costs and output prices remained high in July, but in each case showed signs of easing. Where costs increased, panellists reported higher fuel prices feeding through to increased transportation costs, plus wage rises.

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Employment increased solidly and has now risen for the past 17 months and, allied with falling new orders, the expanded operating capacity allowed firms to clear outstanding business at a rapid pace.

Companies were again pessimistic in terms of their 12-month outlook for activity, but less so than in the previous month.

“Last month witnessed a further deterioration in local business conditions with business activity contracting at its fastest pace in 17 months. Outside of the Covid pandemic and lockdown restrictions, July's rate of decline in business activity was the steepest since November 2012," commented Richard Ramsey, chief economist for Northern Ireland at Ulster Bank.

"Declining market demand is attributed to rising prices. And while the rates of input cost and output price inflation are easing, they remain elevated. As a result, new orders fell for the third month running and, when excluding the pandemic period, at the fastest pace in over a decade. Local firms cited increasing difficulties finding work in the Republic of Ireland.

"The drop in demand was broad based across all sectors with services experiencing the smallest declines in output and new orders. Perhaps unsurprisingly, given the cost-of-living crisis, retail recorded the steepest declines in sales and orders."

He added: "Retail sales have plunged over the last three months and retailers expect sales to be broadly unchanged (i.e. at these lower levels) in twelve months' time. Firms within the services and construction industries remain pessimistic about the year ahead with both sectors anticipating lower levels of activity within the next twelve months.

"Despite a marked drop in orders in recent months, manufacturing is the only sector forecasting a pick-up in activity in that timeframe.

"Positives remain in short supply in the latest survey. However, employment continues to be a bright spot with all four sectors increasing their staffing levels in July. But with the Bank of England forecasting a UK recession, a softening in the labour market will be expected going into 2023."

He concluded, however, that the labour market would be "more robust" than in previous recessions.

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