ECONOMIC performance in the South of England strengthened in July as private sector firms enjoyed higher demand and increasing order books.

The latest Royal Bank of Scotland PMI survey of regional business activity shows a fourth successive month of expansion in the South East and South West as the economic recovery in both regions gathers momentum.

The South West grew at its fastest rate for eight months as companies in the region saw further improvements in confidence and demand. Pressure on profit margins began to ease in both regions as the growth in input costs slowed and companies began to gain a degree of pricing power.

The strong rise in business new orders suggests that growth in the South is set to continue over the next six months. Following a period of uncertainty in the first quarter of 2003, businesses now have greater confidence to increase the promotion of new products and invest in further product development. Construction activity in the region will also be boosted as the government's spending programme begins to deliver new infrastructure projects on the ground.

The UK economy has experienced unbalanced growth over the last two years. Business activity has declined, but consumer expenditure has remained strong.

The economic performance of the South has been held up by the strength of consumer spending and increased government investment over the last two years.

The components of growth are expected to rebalance over the next 18 months as business investment picks up and consumer spending slows to a more sustainable level of growth.

The housing market will be important to economic prospects in the South. Strong growth in house prices has supported consumer expenditure over the last two years, with mortgage equity withdrawal rates increasing during this time.

However, the housing market is beginning to slow. Annual house price growth in Hampshire was 13 per cent in the second quarter of 2003, but house prices actually stabilised between the first and second quarters. RBS expect house price growth to slow, but not contract, over the next year as the economy adjusts to a more balanced structure of growth.