Scottish private sector growth hits two-year high in May, according to latest Royal Bank Purchasing Managers’ Index

Judith Cruickshank (Royal Bank of Scotland)

THE headline Royal Bank of Scotland Business Activity Index – a seasonally adjusted index that measures the month-on-month change in the combined output for Scotland’s manufacturing and service sectors – scored 55.2 in May, up from 53.8 in April, signalling that private sector activity expanded for the fifth month running and at the strongest pace in two years. Supporting growth in activity was a sustained upturn in inflows of new work. However, underlying data again showed that growth across Scotland’s private sector was achieved on the back of improving demand for services, which also helped mask the downturn observed in manufacturing.

As a result, jobs growth and backlog accumulation was limited to service firms. In terms of prices, pressures eased in May after picking up notably in April.

Scottish businesses registered a fourth successive monthly rise in inflows of new work in May. The respective seasonally adjusted index ticked up to a three-month high and was broadly in line with the UK-wide average. The upturn was again centred at service firms, where a quicker intake of new business helped offset a deepening downturn at manufacturers. Surveyed service providers noted that better marketing strategies, new client wins and increased customer activity supported the latest uptick.

Businesses in Scotland remained optimistic towards growth prospects in the coming year in May. In fact, the degree of confidence strengthened on the month, with respondents citing plans for digitalisation and marketing, and hopes of improving demand conditions. However, underlying data again highlighted that positive sentiment was largely driven by the service sector.

Despite the uptick in confidence, firms in Scotland were the least optimistic of the 12 monitored UK regions and nations for the second consecutive month.

A further acceleration in the rate of job creation across Scotland’s private sector was noted in May. Hiring activity was the strongest recorded in three months, owing solely to the increase in service sector employment, where expansions in new business supported recruitment drives.

Of the 12 monitored nations and regions, only Northern Ireland and the North West recorded stronger increases in staffing levels than Scotland.

After a year of continual decline, the level of order backlogs at companies in Scotland rose (albeit fractionally) in May. Underlying data highlighted pressures on capacity largely fed through from the service sector. Firms here linked the upturn to additional business from existing and new clients. Meanwhile, manufacturers depleted their backlogs rapidly.

Alongside Scotland, London was the only other area which recorded a rise in the level of outstanding business.

Pressures on cost burdens remained intense, with input prices again rising sharply across Scotland in May. According to anecdotal evidence, the uptick in prices was largely driven by rising labour, fuel and raw material costs. That said, the rate of inflation eased from April’s eight-month high.

For the first time in four months, input price inflation in Scotland was stronger than that seen across the UK as a whole.

Average prices charged by firms in Scotland rose solidly in May. Panellists noted that the upturn in charges was largely driven by rising cost burdens. In line with the softer rate of increase in input prices, output charges also rose at a moderated pace in May. The rate of inflation was the second-slowest in over three years and weaker than that recorded for the UK as a whole.

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

“The Scottish private sector exhibited further gains midway through the second quarter. The upturn was contingent on the sustained rise in services activity which rose at a sharp and quicker rate and was vital in offsetting the shortfalls seen at manufacturers. Moreover, the divergence between the two sectors is set to persist as manufacturing new orders fell rapidly, while demand trends improved for services. May data also signalled a faster rate of job creation and a fresh rise in outstanding business. However, these upturns were again fuelled by the service sector. While the service sector looks set to expand in the coming months as expectations for future activity strengthens, the manufacturing sector will only hold back growth momentum, unless demand for goods picks up.”

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