Further lockdown restrictions, Brexit and the end of the furlough scheme could limit economic recovery, a leading banking figure has warned.

Manufacturing and service sector firms are on the Covid-19 bounceback, according to the headline NatWest South West Business Activity Index.

Output has now risen for two successive months -indicating a further recovery from the economic impact of the outbreak.

But there are a number of challenges on the horizon, warned Paul Edwards, Chairman, NatWest South West Regional Board.

He said: “The latest PMI data suggest that business conditions across the South West continued to recover in August following an easing of COVID-19 restrictions and the reopening of the economy. The sharp increases in both activity and new orders are welcome news after the severe drops at the height of the pandemic, but there remain a number of challenges to the outlook that could curb the recovery.

"The end of the government furlough scheme in October, worries over second waves of infections and the reintroduction of lockdown measures, as well as whether the UK will secure a Brexit deal are all factors that could limit any bounce back in the coming months."

The index which measures the month-on-month change in the combined output of the region’s manufacturing and service sectors – stood at 59.3 in August, down from a six-and-a-half-year high of 59.7 in July, to signal a further marked increase in overall business activity across the region.

The amount of new work received by South West private sector firms expanded for the second month running in August.

Despite easing from July's 43-month high, the rate of growth remained sharp and was quicker than the series average.

Anecdotal evidence indicated that the easing of COVID-19 lockdown measures and the release of pent-up customer demand had helped to lift sales.

New orders also rose markedly across the UK as a whole in August, with the rate of expansion accelerating since July.

Companies operating in the South West generally expect output to be higher than current levels in 12 months’ time.

Although not quite as robust as those seen in the prior two months, the degree of positive sentiment remained strong overall.

Optimism was supported by forecasts of improved market conditions, increased client confidence and plans to expand capacity.

Business confidence also softened slightly at the national level in August, though remained broadly in line with that seen in the South West.

Latest data indicated that South West private sector employment fell again in August. Although not as severe are those seen in the prior four months, the rate of job shedding remained sharp overall. Companies that registered lower workforce numbers often attributed this to redundancies, while there were also reports of firms not replacing staff that left voluntarily.

A rapid reduction in employment was also seen at the national level, and one that was quicker than that seen in the South West.

As has been the case since November 2018, backlogs of work at South West private sector companies fell midway through the third quarter. Though solid, the rate of depletion was the softest recorded since January.

Reports from panel members indicated that ample capacity to work through unfinished workloads had driven the latest drop in backlogs.

Outstanding business also fell further across the UK as a whole in August, albeit at a softer rate than in the South West.

Private sector companies operating in the South West signalled a further sharp increase in average input costs during August.

Notably, the rate of inflation quickened to a seven-month high. Anecdotal evidence suggested that operating expenses rose due to greater raw material and staffing costs.

In contrast, the rate of cost inflation softened at the UK level, and was weaker than that recorded in the South West.

After stabilising in July, South West private sector companies increased their selling prices during August. That said, the rate of inflation was only modest overall.

Firms that recorded higher output prices often linked this to the pass-through of higher input costs to customers.

At the UK level, output charges rose for the second month running, but the rate of increase remained marginal.