Sustained expansion across services supports Scottish private sector growth, according to latest Royal Bank PMI

Judith Cruickshank (Royal Bank of Scotland)

THE SCOTTISH private sector indicated a solid and quicker expansion in activity during June, according to the latest Royal Bank of Scotland PMI®data. At 53.2 in June, up from 50.7 in May, the seasonally adjusted Scotland Composite Output Index extended the current run of increases to five successive months and at a rate which was above the long-run survey average. The upturn across Scotland also surpassed that seen at the UK level, placing third in the UK regional rankings table behind London and the South East. Moreover, growth of new business also quickened during the month. The upturn was mainly driven by services firms. Turning to prices, despite remaining historically sharp, inflationary pressures showed further signs of easing from the highs seen in the previous two years.

Scotland’s private sector signalled a fifth monthly rise in new business during June. The rate of expansion quickened mainly due to a faster increase at services providers. Panellists noted that greater demand and a general market improvement helped drive the upturn. Meanwhile, manufacturing new orders fell at a slower rate.

Scotland recorded the second fastest expansion in new work among the 12 UK areas, behind London.

The Scottish private sector remained largely upbeat at the end of the second quarter. Sentiment stemmed from planned growth in business, anticipated increases in sales and the launch of new products. That said, confidence dipped to a five-month low, running below the long-run average.

Moreover, of the 12 monitored UK regions, Scotland ranked third from bottom, behind the North East and Northern Ireland.

Private sector companies across Scotland registered a fifth successive monthly rise in employment during June. New projects and contracts encouraged firms to raise their payroll numbers, anecdotal evidence suggested. The pace of job creation eased to a four-month low, however, amid softer expansions across both the manufacturing and services sectors.

The upturn in workforce numbers across Scotland was weaker than that seen at the UK level.

A further fall in backlogs was reported across Scotland during June. The overall decline reflected a further sharp drop at manufacturers as new orders continued to decline. This was, however, almost offset by a rise in outstanding business at service providers.

The downturn in backlogs in Scotland was slower than all other UK regions except London, where a rise was reported.

Inflationary pressure on input prices continued to cool across the Scottish private sector in June. The respective seasonally adjusted index has ticked down in six of the last seven survey periods, printing a 25-month low in June. 

Nonetheless, the pace of inflation remained well above the historical average and was the second-steepest of the 12 monitored UK regions, behind only London. According to anecdotal evidence, wages and increased supplier costs fuelled the latest increase in cost burdens.

In line with easing price pressures, charges levied for the provision of goods and services also rose at a slower rate across Scotland in June. The pace of output charge inflation was the second-softest in 26 months, but remained historically elevated. Companies bumped charges to cover increasing costs.

Growth at which charges rose across Scotland was broadly in line with that seen across the UK as a whole.

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

“The Scottish private sector signalled a stronger performance midway through the year. The upturn was largely supported by a quicker expansion across the services sector, while manufacturing continued to exhibit weakness despite registering a slight increase in production. The diverging trends between the two sectors are a concern as dependence on services grows. This is highlighted by a quicker expansion in new business at services firms, while manufacturers signalled a third monthly contraction in factory orders. New orders also give an indication of business activity in the coming months, and the data from June signals growth will remain skewed towards services. Furthermore, outlook expectations across the two sectors also showed more subdued sentiment across manufacturers, while service providers remained upbeat in comparison.

“In terms of prices, inflationary pressures eased in June, with cost burdens rising at the softest rate since May 2021. Panellists largely attributed the upturn in overall cost burdens to increasing labour costs.” 

Sebastian Burnside, Royal Bank Chief Economist, added:

“As we reach the halfway point in the year, it’s an appropriate time to evaluate the trends we’ve seen up to this point and those that are developing as we move into the third quarter.   

“Growth so far this year has been led by London, which after a sluggish end to 2022 has recovered strongly and recorded sizeable rises in business activity for the past five months. The capital is beginning to show signs of a loss of momentum, however, which is a pattern we’re also seeing in other areas, most notably in Wales, the North East, East Midlands and South West which have all moved into contraction territory in the past couple of months.     

“Only half of the 12 monitored nations and regions saw a rise in new business in June, which, alongside a fall in business confidence in most areas points to a subdued outlook for the near term at least.

“There were some positive takeaways in the latest survey data, including a broad-based easing of price pressures. All areas recorded a slower rise in business costs in June, but in some cases, particularly in London and Scotland, the rates of input price inflation remained historically elevated due in large part to growing wage bills.    

“Tight labour market conditions look likely to persist for the time being, with nearly all regions recording an increase in employment in June, which means underlying price pressures could stay higher for longer too.”

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