THE south west recorded the third consecutive monthly expansion of business activity in June.

A sustained rebound in activity and new orders are now feeding through into higher employment levels, according to the latest Purchasing Managers' Index South West Report, produced for The Royal Bank of Scotland by NTC Research.

Private sector staffing levels in the south west expanded in June, following ten successive months of contraction. Where employment rose, an increase in production needs was cited as the main reason.

This is in stark contrast with the UK-wide experience, where staffing levels recorded the twenty-seventh consecutive monthly contraction.

The seasonally adjusted Business Activity Index indicated a third successive month of output expansion, but slower than the previous month.

Despite the weaker pace of growth, more than 21 per cent of participating firms reported that output had risen in June compared to the previous month. Companies that reported an increase in their order books during the month often linked the rise to a general improvement in business inquires.

Growth of new business nevertheless remained well down on levels seen throughout 2002, reflecting the continued reluctance of many companies to place significant new contracts until the economic outlook is clearer.

A seventeenth consecutive month of rising input prices was recorded in the region. Firms in the manufacturing sector cited the high cost of steel as the main source of inflation. Service sector firms blamed higher wage and salary bills.

The survey registered a second successive month of output price inflation, caused, in part, by firms passing on some cost increases to clients.

The weak sterling against the euro was also reported to have had an inflationary effect on output prices.

Royal Bank of Scotland deputy chief economist, Andrew McLaughlin, said: "The south west economy remained in good shape in June, with growth of both output and order books recorded for the third consecutive month.

"It is encouraging to see evidence that companies have the confidence to hire again after a period of prolonged labour shedding.

"Even though the latest PMI survey suggested that growth of overall business activity had slowed in June, the key point to note was that growth had been sustained."