- Output contracts during August amid quicker fall in new orders
- Growth in employment moderates
- Business outlook dampens, as confidence hits 27-month low
Scottish private firms registered the first contraction in 18 months, according to the latest Royal Bank of Scotland PMI® data.
The seasonally adjusted headline Royal Bank of Scotland Business Activity Index – a measure of combined manufacturing and service sector output – posted 47.8 in August, down from 50.2 in July.
Below the neutral 50.0 threshold for the first time since February 2021, the latest reading indicated a modest decrease in private sector activity. At the same time, inflows of new work fell for the second consecutive month, and that too at a quickened pace.
The drop in business requirements allowed firms to work through backlogs, resulting to capacity pressures easing for the third month running. Also, the rate of job creation measured the weakest in 16 months, signalling a slowdown in hiring activity.
On the flipside, weakening demand gave a respite to inflationary pressures; input prices rose at the weakest pace in seven months, while firms raised their charges at the second-slowest rate since January.
For the second consecutive month, a contraction was recorded in new business received at the Scottish private sector during August.
The rate of decrease quickened on the month as inflows of new orders received at service firms stagnated, while manufacturing companies noted a fourth running month of reduction. According to surveyed businesses, the downturn stemmed from weakening client demand, Brexit, the Ukraine-Russia war, and rising economic uncertainty.
Moreover, the pace of decrease registered across Scotland was stronger than that seen for the UK as a whole.
Expectations towards future activity at Scottish companies moderated during August. The level of positive sentiment dropped to a 27-month low. Rising recession risks, the cost-of-living crisis and declining demand all dampened the 12-month outlook.
Scotland registered weaker output expectations than Wales and all English regions except the North East, although it was more optimistic than Northern Ireland.
Scotland’s private sector firms raised employment for the seventeenth successive month in August. However, reduced business requirements resulted in a slowdown in hiring growth. The latest reading signalled the softest expansion in workforce numbers since April 2021. Firms also cited hiring difficulties amid a highly competitive jobs market.
The latest upturn across Scotland was softer than that at the UK level.
Backlogs of work at Scottish private sector firms fell in August for the third consecutive month. The rate of depletion quickened marginally on the month as the respective seasonally adjusted Outstanding Business Index was largely pulled down by a sharp drop seen across the manufacturing sector. Respondents noted that reduced order volumes and additional staff allowed them to clear away backlogs.
Overall, the rate of reduction was only marginally faster across Scotland than that seen across the UK as a whole.
Average cost burdens facing private sector firms in Scotland increased during August, thereby extending the current run of inflation to 27 months. While the rate of input price inflation recorded the weakest in seven months, it remained strong in the context of historical data. COVID, Brexit, the war in Ukraine and rising energy and raw material prices were all in part blamed for the latest incline.
As has been the case for the last 22 months, Scottish private sector firms continued to raise their charges during August. Thought the respective seasonally adjusted index posted the second-lowest in seven months, it remained comfortably above the long-run series average. According to panellists, the rise in charges reflected higher input costs.
Scotland registered the weakest increase in charges across all 12 UK areas monitored in August.
Source: Royal Bank of Scotland, S&P Global.
Judith Cruickshank, Chair, Scotland Board, Royal Bank of Scotland, commented: “August data signalled a deterioration across the Scottish private sector, as activity levels fell for the first time in 18 months. Moreover, weak client demand and rising economic uncertainty, with a threat of a recession looming, resulted in falling inflows of new business.
“The latest survey data did indicate some easing of upward pressure on input costs as a result of a reduction in client appetite. Nonetheless, inflation rates remained stubbornly strong.
“Moreover, the contraction across the sector impacted business confidence, which hit a 27-month low during August. Market uncertainties and the cost-of-living crisis heavily weighed on optimism and suggests a gloomy performance in the months ahead.”