Figures from NatWest’s Cymru Growth Tracker showed Welsh businesses suffered the steepest output fall of any UK region during the survey period.
The research indicated that rising price pressures and global uncertainty were weighing on the private sector.
The Wales Business Activity Index, which monitors both manufacturing and services sectors combined, fell to 46.2 in March from 49.3 in February – the fastest decline recorded across all 12 UK areas monitored and the weakest performance since September the prior year.
Jessica Shipman, chair of the NatWest Cymru Board, said the opening quarter had seen Welsh firms maintain some drive, but March data reflected more challenging trading conditions as tensions in the Middle East led consumers to become more hesitant while expenses mounted.
New work and production both contracted at quicker rates, and confidence among firms also fell sharply.
She highlighted that the standout feature was a marked increase in cost-related pressures, driven by higher fuel, logistics and energy charges.
Ms Shipman added that despite subdued demand, companies were able to transfer some of their mounting costs to purchasers.
However, should strain on household finances deepen, the capacity to pass on higher cost burdens is likely to become more limited.