Scottish private sector downturn worsens in October

Judith Cruickshank (Royal Bank of Scotland)

THE LATEST Royal Bank of Scotland PMI® survey signalled a second monthly deterioration in private sector activity during October. Moreover, the headline Scotland Business Activity Index – a measure of combined manufacturing and service sector output – fell to 46.5 from 49.3 in September, indicating the sharpest decline since November last year. Worsening underlying demand conditions and the cost-of-living crisis were said to have contributed towards the latest fall in output. Additionally, the downturn across Scotland was more pronounced than that recorded for the UK as a whole.

Despite souring business conditions, Scottish private sector firms increased their workforce numbers in October. The rate of job creation was the fastest in five months. and the quickest seen of all the UK nations and regions.

A solid decline in new orders was reported across the Scottish private sector in October. The rate of contraction quickened from September and was broadly in line with the UK trend. A high interest rate environment and rising economic uncertainty were said to have contributed towards the downtick in sales.

While the Future Activity Index posted above the neutral 50.0 mark to indicate confidence surrounding output expectations over the year-ahead across Scotland’s private sector in October, the degree of optimism remained historically subdued and even weakened fractionally since September. Brexit, the ongoing war in Ukraine, rising energy prices and the current slowdown in the economy all heavily weighed on expectations.

Of the 12 monitored regions and nations, only Northern Ireland and the North East recorded a weaker outlook than Scotland.

Despite deteriorating business conditions, employment growth remained resilient across Scotland, thereby extending the current run of expansion to nine successive months. Moreover, the rate of job creation quickened to a five-month high. The uptick was spurred by stronger growth in services employment and a fresh rise in across manufacturers. Firms reported successful recruitment of suitably skilled staff and the replacement of voluntary leavers. 

Scotland registered the strongest job creation across all 12 monitored regions and nations.

Sustained falls in new business and growing staffing levels meant that backlogs across Scottish firms declined in October. The rate of depletion was the fastest since January and stronger than that seen historically. Respondents also noted that shorter lead times allowed firms to complete outstanding work. 

The downturn recorded across Scotland was in line with that observed at the UK level.

Cost burdens grew rapidly across Scotland during October. Firms noted that higher wages and energy prices contributed towards greater input prices. That said, inflationary pressures moderated for the eighth time in 2023 so far, to the weakest since February 2021.

Nonetheless, the rate of input price inflation across Scotland surpassed the UK average.

As has been the case in each month over the last three years, average prices charged by Scottish private sector firms increased during October. Despite being the second-weakest in 30 months, the rate of growth was sharp overall and stronger than the pre-COVID average. Rising material, energy and labour prices led firms to pass on cost burdens to customers.

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

“With demand taking a step back over the last couple of months, the Scottish private sector displayed further weakness at the start of the final quarter. Spurred by sharper declines across both the manufacturing and services sector, business activity dropped at an accelerated pace in October. The downturn was the most pronounced in 11 months. Nonetheless, waning demand helped to assuage inflationary pressures, which were much weaker than this time last year. That said, rising costs for raw materials and renewed pressure from rising global prices meant that cost burdens, and in turn selling prices, still rose at historically elevated rates. However, employment trends remained resilient, with workforce numbers rising at the quickest pace in five months.”

Sebastian Burnside, Royal Bank of Scotland Chief Economist, said:

“Most regional economies remained under pressure at the start of the fourth quarter, with activity falling in nine of the 12 monitored areas.

“London remains the main bright spot, having seen activity not only grow in October, but also at a solid rate. Businesses in the capital are reporting robust customer demand, which contrasts with the situation in almost every other area.

“There has been greater caution around hiring in recent months as businesses contend with lower activity and rising costs, and we saw further evidence of this in October as employment once again fell across the majority of areas. However, the latest results did at least point to some signs of resilience across local labour markets, with rates of job shedding generally easing and three regions even recording renewed rises in employment.       

“Whilst business costs generally rose more slowly in October, this didn’t always translate into slower increases in prices charged for goods and services as rates of inflation ticked up in half of cases. There is some stickiness in inflationary pressures, driven by ongoing wage increases and the recent resurgence in fuel prices.”

The latest stories