Business activity in Northern Ireland fell at its sharpest rate since February 2021 in December as new orders declined rapidly and the rate of decline in output accelerated.

The latest Ulster Bank Northern Ireland purchasing managers' index (PMI), produced by the bank and S&P Global, shows employment was unchanged following 21 successive months of expansion and inflationary pressures eased.

The headline seasonally-adjusted business activity index fell from 46 in November to 41.6 December, indicating that output in the private sector reduced much faster than previously to end the year.

The cost of living crisis was reportedly a key factor behind the drop in activity as new orders continued to fall sharply, and activity decreased across all four broad sectors covered in the survey, with the fastest reduction seen in construction.

In terms of employment, some firms managed to expand staff, but others reported voluntary resignations and difficulty recruiting.

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Both input costs and output prices rose at the slowest rates since early 2021, explaining the moderation in inflation, but prices still increased rapidly.

Where input costs were up, panellists mentioned higher costs for energy and transportation. Suppliers' delivery times continued to lengthen, with delays linked to Brexit and postal strikes. 

Although companies remained downbeat on the prospects for output growth during 2023 due to the cost of living crisis and political uncertainty, sentiment improved to an eight-month high.

Richard Ramsey, chief economist for Ulster Bank in Northern Ireland, said the region's private sector had ended a year badly affected by the war in Ukraine on "a negative note".

December saw output and orders fall for the eighth successive month," Ramsey said. "The contraction in output was the steepest in a decade outside of lockdowns. All four sectors posted declines in output and orders although retail, services and construction firms did increase their staffing levels.

"The good news is that inflationary pressures moderated with firms reporting the weakest rise in input costs in 22 months. As a result, firms raised their prices at their slowest pace in almost two years. But these price rises still exceed anything that occurred in the pre-pandemic era.

"This time last year, firms were braced for a challenging year, but it turned out much worse than anticipated. December’s report suggests that negative sentiment is receding and that we may have passed peak pessimism. This year, expectations for the 12-months ahead are low but we could see the converse of last year with expectations being exceeded this time around."

The sub-indexes measured 40.5 for new business, 43.0 for backlogs, 50.0 for employment, 76.1 for input costs, and 62.1 for prices changes, with a reading of 50.0 indicating no change on the previous month.

AIB PMI data for the Republic of Ireland in December showed the services sector grew for the 22nd successive month while manufacturing declined for a second month running.

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