Yorkshire’s private sector economy has slipped into decline, driven by the fastest increase in business costs in more than three years, a key survey indicates.
The NatWest Yorkshire & Humber Business Activity Index—a measure of combined manufacturing and service sector output—fell to 48.4 in March, down from 50.1 in February and hitting a four-month low. Any reading below 50 denotes contraction.
This placed the region at odds with the UK as a whole, which registered a marginal expansion. The decline ended a period of growth stretching back to last November, with companies reporting a reduction in new business during the month.
The Inflation Squeeze: From Global Conflict to Local Costs
The primary force behind the downturn is a severe cost inflation shock, which firms directly link to the war in the Middle East. Malcolm Buchanan, chair of the NatWest North Regional Board, stated that the conflict is pushing fuel costs up sharply, squeezing supply chains and driving the price of oil-intensive goods higher.
This energy price shock has translated into extreme volatility in wholesale markets; UK natural gas futures climbed 80% in March alone. The Bank of England has warned that the conflict poses a significant inflationary risk, with spot oil and gas prices already running well above forecasts.
The impact is rippling through business operations. Global shipping routes are being rerouted, adding delivery times and compressing freight onto alternative paths, which in turn drives up logistics costs and insurance premiums. Research from February 2026 indicated 80% of UK exporters felt exposed to such geopolitical risks.
This environment is forcing difficult decisions on company finances. “Cost increases are being passed on, but not fully, hinting at some reservation to ratchet up charges given the high degree of uncertainty surrounding the conflict and its duration,” said Malcolm Buchanan.
Caution on Hiring and a Focus on Efficiency
This uncertainty is also dictating staffing and investment strategies. Companies are exercising caution, holding back on hiring and leaving vacancies unfilled as they prioritise productivity growth.
This trend was visible in the survey data: headcounts fell in March, extending a period of job shedding. However, the rate of decline softened for a second successive month and was the slowest since October 2025, a pattern in line with the wider UK trend where the unemployment rate has been edging up.
Notably, backlogs of work decreased even as employment fell, which NatWest suggests indicates strong efficiency gains within businesses. This focus on productivity comes amid a tough national backdrop where company insolvencies increased by 7% month-on-month in March.
Resilient Confidence Amidst the Slowdown
Despite the immediate pressures, business confidence in Yorkshire and Humber showed resilience. The region was one of only two across the UK where future expectations improved in March.
Local firms remain optimistic about growth over the next 12 months, with plans for investment, entries into new markets, and upcoming product launches underpinning this outlook. This sentiment persists even as broader forecasts are downgraded; the Office for Budget Responsibility has revised its UK GDP growth forecast for 2026 down to 1.1%.
The region’s longer-term economic strengths, such as its ports which handle 17% of the nation’s trade and significant investment planned for a rail manufacturing hub in Goole, may be contributing to this confidence. However, other surveys present a mixed picture: broader research from the West & North Yorkshire Chamber of Commerce for the first quarter of 2026 showed a decline in business optimism, with weaker sales and reduced investment intentions, though this was assessed before the full impact of the Middle East conflict was felt.
The NatWest data was published ahead of key national economic updates, including the latest monthly unemployment and inflation figures.
