Scottish output declines further in January as business confidence falls

Malcolm Buchanan

Output across Scotland’s private economy declined for a second successive month at the start of 2019, the first time since August 2016 that a back-to-back drop in activity has been recorded.

According to the latest Royal Bank of Scotland PMI, new business also fell in January, enabling firms to clear backlogs of work. Output expectations were also pared back, with optimism easing to a 21-month low.

The seasonally adjusted headline Royal Bank of Scotland PMI posted 49.2 in January, a fraction below December’s print of 49.3.

Although this signalled only a mild reduction in private sector output in Scotland, it was the strongest in almost two-and-a-half years. As was the case in December, the downturn was broad-based across both manufacturing and service sectors.

Anecdotal evidence indicated that heightened uncertainty and faltering consumer confidence had contributed to lower activity levels.

Of the 12 monitored UK areas, four recorded lower output in January and only London observed a faster decrease than Scotland.

Latest survey data signalled falling demand in Scotland, but the sector split revealed the drop was driven by manufacturers, as service providers recorded mild growth. According to goods producers, order intakes fell as a result of diminished client demand. Uncertainty was also mentioned by panellists as a factor impacting order book volumes. At the UK level, private sector new order intakes decreased modestly and at a quicker rate than observed across Scotland.

A solid decrease in manufacturing orders and just a mild rise in demand for services coincided with a further monthly decline in outstanding workloads in January. Both sectors reported reduced backlogs, but the rate of depletion was softer than in December in both cases.

Some panellists attributed lower volumes of incomplete work to increased staffing levels. Survey data pointed to further job creation in Scotland during January, extending the current upturn in recruitment to 11 months. This contrasted with the overall UK trend, where workforces were reduced.

Inflationary pressures eased across Scotland in January, with both input costs and output prices increasing at slower rates. That said, operating expenses rose sharply amid reports of sterling weakness and increased raw material costs.

Lastly, business confidence dipped to a 21-month low in January, with economic uncertainty weighing on sentiment. That said, strategic changes, new product offerings and planned efficiency improvements were all cited as reasons to be optimistic overall.

Malcolm Buchanan, Chair, Scotland Board, Royal Bank of Scotland, said: “While the UK as a whole approached near-stagnation in January, Scotland was one of four UK areas where output declined. In fact, the contraction north of the border was only outpaced by that seen in the capital. Scotland’s manufacturing sector drove the downturn, with economic uncertainty and weak consumer confidence cited by surveyed businesses. The knock-on effect was a paring back of business optimism, as expectations hit their weakest in almost two years.”