Bank of Scotland

Scotland’s private sector economy contracts slightly in September

08 October 2012

  • Output falls as downward trend in new work continues
  • Employment broadly unchanged on month
  • Input price inflation hits eight-month high

September’s Bank of Scotland PMI report showed private sector output north of the border decrease for the first time since December 2010, reflecting a sustained fall in incoming new work. Employment levels were kept broadly steady over the month, while excess capacity was signalled by a further reduction in backlogs. Businesses also took a hit on the costs front, as input price inflation accelerated to the fastest since January on the back of rising fuel and commodity prices.

Total output across Scotland’s manufacturing and service sectors combined decreased slightly in September, as signalled by the Bank of Scotland PMI posting 49.6 – down from 50.3 in August. That contrasted with modest growth across the UK as a whole. There were negative developments in the performance of both broad sectors north of the border, with a marked and slightly accelerated decrease in goods production more than offsetting slower growth in services activity.

September saw a third straight monthly decrease in the amount of new business placed with Scottish private sector firms. The rate of decline eased since August, however, and was only modest overall. Sector data showed that a renewed (albeit marginal) increase in new business at services firms contrasted in a sharp drop in new orders for manufactured goods.

The level of employment in Scotland’s private sector was virtually unchanged in September from one month before, bringing to an end a three-month sequence of job creation. The Scottish jobs market showed considerable resilience compared to the broader UK picture, with nine out of the other 11 regions monitored by PMI data recording decreases in employment.

September data meanwhile showed a further decrease in the volume of outstanding business at Scottish private sector companies, highlighting a degree of excess operating capacity. The pace of decline was solid, but the slowest in three months.

Input price inflation quickened again in September, and was the fastest in eight months amid rising prices for commodities and fuel. Stronger cost pressures led to a second consecutive monthly increase prices charged by private sector firms north of the border, though competition restricted pricing power to an extent and charge inflation was only modest overall.

Donald MacRae, Chief Economist at Bank of Scotland, said: "The PMI ended a twenty month run of positive readings showing the private sector of the Scottish economy contracting slightly in September. Growth in services activity did not quite offset a fall in manufacturing output. However employment did grow in the month while the rate of decline in new orders eased since August. The services sector recorded a rising level of new business. The Scottish economy is struggling to maintain growth momentum in the face of both the Eurozone and global slowdowns.”

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