Manufacturers bear brunt as private sector slows

Chief economist Donald MacRae
Chief economist Donald MacRae
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Growth in Scotland’s private sector economy slowed to an 18-month low in September as manufacturers suffered their first decline in production this year, a key study out today showed.

The latest purchasing managers’ index (PMI) from Bank of Scotland came as a separate survey from accountant BDO revealed the faltering global economy has dented confidence across the manufacturing sector, with output expectations falling at the fastest pace since May 2013.

Despite the gloomy outlook, hiring intentions have hit a fresh post-crisis high, raising hopes that activity could pick up again this month.

Bank of Scotland said a “subdued trend in new business” associated with uncertainty over last month’s independence referendum was another factor behind the slowdown, which saw its PMI reading fall to 51.5 – a marked reduction from ­August’s figure of 54.6.

The bank’s chief economist, Donald MacRae, said: “Despite this slower increase in business activity, employment increased in both the manufacturing and services sectors, indicating continuing confidence for the future and the prospect of a rebound in activity in October.”

Although job creation among services firms continued “at a solid lick”, MacRae said that the rate of employment growth among manufacturing companies “eased sharply” in September to its lowest level so far this year.

However, BDO said its employment index recorded its 13th consecutive rise last month, indicating that firms expect to increase hiring towards the end of the year, and weak global demand could actually help firms by reducing cost pressures.

Already struggling with no growth and minimal inflation, the eurozone has recently seen a new danger from Germany, its main economic powerhouse. Last week, industrial orders and output data showed the steepest drops in more than five years, while the country’s dominant export sector suffered a plunge.

Martin Gill, head of BDO in Scotland, said: “With global conditions becoming increasingly challenging, it was only a matter of time before the stellar increases in economic growth recorded earlier this year came to an end.

“Given their reliance on exports, manufacturers have borne the brunt of weakening global demand, but the effects of stuttering worldwide growth are obvious throughout the economy.”

Gill said that falling cost pressures represented good news for company profits, but this “worrying” trend brings the economy “closer to the deflation scenario that has spooked European policymakers”.

The International Monetary Fund last week cut its 2014 global growth forecast from 3.4 per cent to 3.3 per cent – its third reduction this year – and has flagged ­Europe as the top concern.

Today’s surveys following the manufacturing PMI published by Markit and the Chartered Institute of Purchasing & Supply earlier this month, which showed that factory orders were “near stagnation” levels in September amid the sector’s worst performance for 17 months.

Finance secretary John Swinney said: “Conditions are challenging in the Scottish manufacturing sector, with domestic and export orders down in September. This highlights that there is no room for complacency as the economic recovery progresses, and emphasises the need for continued investment in order to drive sustainable economic growth.”