Manufacturing Weakness Behind Slowdown in Scottish Private Sector Activity

Steven Bobson, Europe & Americas Editor
August 13, 2012 /

Businesses within Scotland’s private sector economy had a challenging start to the third quarter, according to the latest Bank of Scotland PMI report.

Output growth slowed in July on a decrease in incoming new business, while input cost inflation increased to a rate that was much faster than that seen across the UK on average.

Latest data pointed to only a marginal increase in output across Scotland’s manufacturing and service sectors combined in July, with the rate of growth slower than that registered during the preceding month. This was highlighted by the seasonally adjusted Bank of Scotland PMI posting 51.0, down from 52.5 in June.

Sector data showed that a further rise in activity at service providers was partly offset by a reduction in goods production – the most marked for over a year-and-a-half. Albeit only marginal, growth in Scotland contrasted with a reduction in output at the UK level.

July saw a slight decrease in new work placed with Scottish private sector businesses, ending a run of expansion that stretched back to last December. The key area of weakness was again in manufacturing, where new orders fell at an accelerated rate to offset marginal growth in the service sector.

Despite demand across Scotland’s private sector weakening in July, firms continued to recruit additional staff over the month. The overall rate of job creation was broadly unchanged since June, and roughly in line with that recorded across the UK economy as a whole. Driving employment higher north of the border was net staff hiring at service providers.

Fewer intakes of new business enabled firms to further reduce backlogs of work, extending the current sequence of decline to 11 months. Furthermore, the rate of clearance was the sharpest since April, and solid by the historical standards of the series.

Input price inflation accelerated to the fastest in three months during July, primarily reflecting greater cost pressures at service providers. Of the regions monitored by PMI data, only Northern Ireland saw a comparatively steeper increase in average input costs.

Prices charged by private sector companies in Scotland were virtually unchanged on average during July, as competition forced firms to absorb higher costs.

Donald MacRae, Chief Economist at Bank of Scotland, said: “The July PMI suggests growth in the private sector of the Scottish economy was marginal with a fall in manufacturing output offset by continuing growth in service activity. The Scottish economy is struggling to maintain growth momentum in the face of the global slowdown. Low or no growth is in prospect for the rest of 2012.”

Growth of output across the Scottish manufacturing and service sectors combined slowed to a marginal rate in July. Although only slight, the increase was the nineteenth in consecutive months, and in contrast to contraction across the UK as a whole. Underpinning growth north of the border was a further (albeit slightly slower) increase in activity at service providers, extending the period of expansion in the sector to over a year-and-a-half. Meanwhile, goods production decreased solidly, and at the fastest rate since December 2010.

New business placed with private sector firms operating in Scotland decreased in July, thereby ending a seven-month spell of growth. That said, the rate of contraction was only marginal overall. Sector data showed that a solid and accelerated decrease in intakes of new orders at manufacturers was the predominant factor behind the overall weakening trend. New business received by service providers increased over the month, but at a reduced and only marginal rate. Data for the UK as a whole pointed to a stagnation in new business inflows.

Business outstanding at Scottish private sector firms fell at a solid rate in July, and one that was the sharpest since April. That stretched the current sequence of backlog clearance to 11 months. Manufacturers registered by far the steeper decrease in work-in-hand (but not yet completed) – the sharpest in the sector since last November. The rate of decline at service providers meanwhile remained modest. Across the UK as a whole, levels of unfinished work fell at a marked rate that was comparatively faster than that recorded north of the border.

Latest data showed input price inflation across Scotland’s private sector economy tick up to the fastest in three months during July. Trends at the sector level contrasted starkly, with a robust and accelerated increase in average costs facing service providers comparing with largely no change in cost burdens for their manufacturing counterparts. Services firms suggested that rising food and transport costs had placed upward pressure on inflation. Across the UK as a whole, costs pressures were comparatively modest compared with Scotland.

After increasing only slightly on average over the previous two survey periods, prices charged by Scottish private sector businesses were broadly unchanged during July. Factory gate prices fell fractionally, though the overall impact on output prices was negated by stagnation in selling prices across the larger service sector. Anecdotal evidence suggested that competitive pressures had weighed on charges, with service providers unable to pass on the burden of higher costs to clients. July saw a further marginal fall in output prices at the UK level.

Employment across Scotland’s manufacturing and service sectors combined increased for the second month in succession during July. The overall rate of job creation was virtually unchanged since the previous survey period, and broadly in line with the average registered across the UK economy as a whole. Hiring activity in Scotland was primarily centred on the service sector, where headcounts rose at a faster rate than during the preceding month. Staffing numbers at goods producers meanwhile increased only marginally.

 

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