LONDON BUSINESS ACTIVITY CONTRACTS FOR FIRST TIME IN OVER TWO YEARS AMID ECONOMIC UNCERTAINTY

London’s private sector output declined in April for the first time since 2022, as economic uncertainty and cost pressures weighed on demand and business confidence. The capital’s latest Business Activity Index fell to 49.7, down sharply from 54.9 in March, slipping below the 50.0 neutral threshold that separates growth from contraction for the first time in 29 months.

The index, which reflects month-on-month changes in combined output across London’s manufacturing and services sectors, signalled a marginal yet notable decline in business activity. Firms widely linked the drop in output to heightened client caution, driven largely by escalating global trade tensions — most notably recent US tariff announcements.

While some businesses reported new contract wins and expanding customer bases, this was not enough to offset broader signs of slowing demand.

The survey, conducted shortly after the US imposed a 10% minimum tariff on imports — followed by a 90-day pause on most of the new rates — revealed that these developments had a tangible impact on sentiment and spending across key sectors.

“Firms across London reported a challenging start to the second quarter, with demand for goods and services falling amid a backdrop of economic uncertainty and rising prices,” said Sebastian Burnside, Chief Economist at NatWest. “London’s decline was the first seen since November 2022.”

Burnside added: “It’s encouraging that firms are still looking to the future with some optimism, although growth expectations are lower than they have typically been in the past. In London, firms highlighted long-term investments and opportunities in foreign markets as possible drivers of growth.”

Labour Market Continues to Tighten

Employment in London fell for the fifth consecutive month in April, as firms chose not to fill vacated roles in the face of softening activity and rising payroll costs. The pace of decline slightly accelerated from March but remained among the softest across the 12 UK regions tracked.

The labour market across the UK remained under pressure, with only Scotland avoiding a fall in employment. “Rising labour costs have added to pressure on businesses, following April’s increases in National Insurance contributions and minimum wages,” Burnside explained. “As firms look to mitigate rising costs, we’ve seen average prices charged for goods and services increase at faster rates.”

Input Costs Surge

Input price inflation rose at its fastest pace in 20 months across the capital. Although London’s increase was marginally lower than the national average, the cost burden was clear. Businesses pointed to higher wage bills, IT expenses, raw material costs, and a significant jump in employer National Insurance contributions.

To offset this, many firms passed these costs on to customers. Selling prices increased at the steepest rate since February 2023, though again, London’s rate was slightly lower than the UK average.

London Versus the Nation

Despite the downturn, London fared comparatively well. The contraction in activity was the softest among the 11 UK regions that reported a decrease in output. The South West was the only region to record growth during April.

Still, the drop in new business marked a sharp reversal after a 19-month stretch of expansion. Most firms attributed the fall to client caution stemming from international trade concerns, although some noted encouraging signs of new market reach and customer acquisitions.

Business confidence also took a hit, with output expectations falling to their lowest level since October 2022. Nonetheless, companies continued to project output growth on average, citing long-term investment, opportunities abroad, technological adoption and strong cash reserves.

Sector Spotlight: London’s Industrial Mix

According to the report, London’s manufacturing sector is heavily concentrated in textiles and clothing, food and drink, and timber and paper. On the services side, financial intermediation, computing and IT services, and B2B services dominate the capital’s business landscape.

A Resilient Outlook

Despite the headwinds, Burnside offered a note of cautious optimism. “We cannot ignore the backdrop during which this survey was carried out, but regardless — as we’ve seen in the past, and as the South West and Scotland illustrate — UK business is resilient and can always offer reasons for optimism throughout.”

As firms continue to navigate inflationary pressures, global trade volatility, and shifting market conditions, the coming months will be crucial in determining whether April’s dip in activity is a temporary blip — or the beginning of a more persistent slowdown.