Economy falters as China and pound dent optimism

GROWTH in Scotland’s private sector economy practically ground to a halt last month as the strong pound weighed on exports, according to a new study.

Picture: John Devlin
Picture: John Devlin
Picture: John Devlin

Today’s purchasing managers’ index (PMI) report, from the Bank of Scotland, came as a separate study from accountant BDO revealed a sharp drop in business confidence, suggesting the current momentum was under threat.

Although BDO said economic growth was set to continue throughout the rest of the year, “cracks” are beginning to emerge in the longer-term outlook as exporters – already under pressure by the continued strength of the pound – fretted about the turmoil in China and the possible knock-on effects around the world.

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The firm’s optimism index fell to 101.9 in August, down from 103.3 the previous month, showing that companies are concerned about their prospects beyond 2015. Manufacturers were said to be particularly concerned, recording their lowest confidence level for nearly three years.

Martin Gill, head of BDO in Scotland, said: “While the expected continued economic growth is encouraging, falling business confidence suggests we’re approaching a turning point in the economy.

“Policymakers cannot ignore this, otherwise they run the risk of an economic slowdown. Any rumours of a rate rise in the near future must be squashed. Now is not the time to cut household spending, the very thing driving economic growth, or to introduce moves that will strengthen the pound further and hit our exporters.”

Gill’s comments came as the Bank of Scotland said growth slowed to its lowest level since April, despite staffing levels rising in August following a reduction seen in the previous month.

Its headline PMI figure, which is a single measure of the month-on-month change in manufacturing and services output, gave a reading of 50.8, down from 52.2 in July. A figure below 50 would indicate an economic contraction.

Average input costs rose in August, although the rate of inflation eased to the weakest since February 1999 amid lower fuel prices and the strength of sterling.

Input prices rose in the service sector, but a decrease was signalled by goods producers, while both sectors reported growth in domestic new business.

Donald MacRae, chief economist at the Bank of Scotland, said: “August’s PMI was 50.8, recording a fall in the month but still signalling growth.

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“Output and employment grew in all sectors but at modest rates. New business grew slowly in both manufacturing and services while new export orders fell for the seventh successive month.”

MacRae added: “The private sector continues to recover from the slowdown at the start of the year but the Scottish economy will have to rely on the government sector to raise growth to trend levels in the third quarter of this year.”

Economists at Barclays have forecast that the UK’s third-quarter GDP growth could slow to 0.5 per cent, from 0.7 per cent in the previous three-month period, after figures last week showed the second consecutive decline for industrial production in July.

Weak construction data has also added to signs of a cooling economy, with housebuilding activity falling for the first time since March 2013.

The Bank of England lowered its third-quarter growth forecast to 0.6 per cent, compared with 0.7 per cent previously, after leaving interest rates unchanged last week at a record low of 0.5 per cent.