Scottish business activity growth softens as manufacturing output contracts sharply, according to latest Royal Bank PM

14/08/2023

ACCORDING to the latest Royal Bank of Scotland PMI® survey, Scottish private sector companies expanded their output for the sixth successive month in July. That said, the rate of increase slowed since June as the seasonally adjusted Composite Output Index fell to 51.1 from 53.2. Trends diverged on a sector level with service providers continuing to report modest, albeit slightly softer growth in business activity. Goods producers, however, signalled a renewed and sharp contraction in output amid reports of demand shortfalls.

New business received across Scottish private sector firms remained broadly unchanged at the start of the third quarter. Albeit only fractionally, the seasonally adjusted index dipped below the crucial 50.0 mark for the first time in six months, led by a deepening contraction at manufacturers amid reports of reduced demand from clients and market inactivity. Meanwhile, service providers signalled a slowdown in new business growth. 

July saw the degree of sentiment towards activity in 12 months’ time weaken to its lowest since January and move further below the long-run average. Companies recorded a drop in confidence as reports of a high interest rate environment, cooling demand and the cost of living weighed on the outlook. Moreover, Scotland was the least optimistic of the 12 monitored UK areas. Nonetheless, hopes of improved market conditions and the launch of new products allowed some firms to maintain a positive outlook. 

July data signalled a rise in employment across Scotland for the sixth consecutive month. Panellists reported success in filling long-standing vacancies and replacing voluntary leavers. However, the upturn was only fractional amid a fresh reduction in services employment, while manufacturers recorded the softest expansion in five months.

Moreover, the rate of job creation seen across Scotland was weaker than the UK-wide average.

The level of outstanding business at Scottish private sector firms fell for the third successive month in July. Though modest, the rate of backlog depletion quickened since June. Businesses linked the drop in outstanding work to fewer sales. 

However, the pace of decrease across Scotland was the second-softest of the 12 monitored UK areas, behind London.

Companies in Scotland recorded a rise in cost burdens in July, thereby stretching the current run of inflation to 38 months. Though the rate of inflation was the softest since February 2021 and slower than the UK-wide average, it remained rapid overall and stronger than the historical average. According to surveyed businesses, wages, energy, food and rent exerted upward pressure on costs.

As has been the case in every month since November 2020, private sector firms in Scotland recorded a rise in output charges in July. According to anecdotal evidence, selling prices were raised in line with the continued increase in cost burdens. However, the upturn in output charges was among the weakest recorded over the last two years.

Judith Cruickshank, Chair, Scotland Board, Royal Bank of Scotland, commented:

“The start of the second half of the year saw a slowdown across the Scottish private sector amid a softer expansion in output, while new business remained broadly unchanged from June. Data split by sector highlighted that growth was skewed towards the service sector. Goods producers, meanwhile, pointed to a continual and accelerated drop in factory orders which then fed into a fresh contraction in manufacturing production. 

“The overall cooling in business activity growth meant that employment levels were raised only fractionally in July. Moreover, the rate of job creation was the weakest seen in the current six-month spell of employment growth. With the level of outstanding business falling for the third month straight, there’s less incentive for firms to raise workforce numbers in the coming months. Additionally, the outlook for business activity remained historically muted, with confidence printing the weakest since January.”

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