Confidence in Scotland’s private sector dips to 28-month low amid further slowdown in demand

The overall condition of Scotland’s private sector economy was subdued, with key gauges of business health such as output and new orders falling, while employment approached near-stagnation, according to the latest Royal Bank of Scotland PMI.

Malcolm Buchanan

Brexit-related uncertainty and concerns regarding client confidence led optimism to ease to a 28-month low. Meanwhile, survey data signalled a sharp but weaker rate of input cost inflation in February. Consequently, output charges were lifted.

The seasonally adjusted headline Royal Bank of Scotland PMI registered below the 50.0 no-change threshold in February, signalling a further decline in private sector business activity. At 49.4, the headline figure was slightly up from January’s 49.2, but signalled a notable divergence from the overall UK picture, where output increased. 

Of the 12 monitored parts of the UK, only three recorded contraction, the other two being the North East and London. Scotland’s downturn was primarily driven by the manufacturing sector, where production fell strongly. Service sector activity increased fractionally.

Latest survey data signalled a third successive monthly decline in Scottish order book volumes, with the fall gathering pace since January. Matching the trend in output, the decrease centred on the manufacturing sector. Although service providers reported demand growth, it was notably slower than those seen across most of 2018. Where a slowdown was recorded, this was attributed to underlying weakness in some industries.

Some firms also indicated that Brexit-related uncertainty had weighed on sales performances. 

The sustained easing in demand meant firms were able to channel more resources to completing outstanding workloads. Backlogs were reduced for a fifth straight month and to a quicker extent. Overall, the rate of depletion was broadly in line with the UK as a whole.

With business activity and new orders falling, employment growth eased in February. In fact, the increase in staffing levels was fractional, with cost-cutting efforts at some firms almost offsetting new hires at others.

Input prices increased at the slowest pace since August 2016. However, the rate of inflation was sharp overall, which firms attributed to higher food, fuel, labour and transport costs. As a result, output charges were raised at a pace broadly in line with the 12-month average.

Business confidence dipped for a third straight month in February, reaching the lowest since October 2016. Furthermore, optimism in Scotland was the second-weakest of all 12 monitored UK areas. Brexit and concerns towards the domestic economy were commonly cited factors which weighed on sentiment.

Malcolm Buchanan, Chair, Scotland Board, Royal Bank of Scotland, said: “Latest PMI data for Scotland portrayed a further downbeat assessment of the economy north of the border, with the two key business health gauges of output and new orders both in contraction territory. Indeed, relative to the other 11 monitored areas of the UK, Scotland was among the underperformers.

“Weighing on the economic climate in Scotland was uncertainty, particularly relating to Brexit and the knock-on effects this will have on client confidence. Business optimism subsequently dwindled to a 28-month low in February. Caution was also signalled by employment data, which showed just a rate of growth below the long-run trend.”