Fresh recession fears as services sector slumps

According to the closely-watched PMI report from Royal Bank of Scotland, Scottish output in manufacturing and services slumped last month to lows not seen since the aftermath of 11 September.

The PMI barometer of output dived from 50.3 to 49.1 - depths last hit in November 2001. Any reading below 50 shows that the economy is shrinking. Growth in Scotland has haemorrhaged every month since September 2002, dragged down by the besieged manufacturing sector.

But in January the economy suffered a new blow as services companies joined manufacturers on the downward spiral.

Against a backdrop of tumbling consumer confidence and plummeting share prices, the services sector shrank for the first time since October 2001. New business was the weakest in 14 months, with business services, financial services and the tourism industry all reporting a slowdown in new orders.

Manufacturing, meanwhile, remained mired in the red. Output, order books, exports and employment all declined on the month.

RBS chief economist Jeremy Peat said the question whether January will prove a temporary blip, or herald the onset of another recession in the Scottish economy, is an "understandable concern".

He added: "I still think the contraction in the services sector may prove a temporary aberration, but clearly this is not a hugely positive message for the Scottish economy."

Andrew Wilson MSP, the shadow minister for enterprise, was less sanguine about the prospects for growth over the months ahead. He said: "All these indicators point to a contraction in the economy over 2002 that is set to continue into the current year.

"Technically we are not in recession, but we are already in the equivalent of recession because output in the last 12 months was lower than the previous year."

There have been few signs of an upturn in the Scottish economy this year. Economists say the outlook for exports is grim, and business investment remains weak with potential war in the Gulf casting deep uncertainty on the horizon.

Scottish workers paid the price of withering output last month as job losses in the private sector surged to the fastest pace in four years.

Services sector employment slid for a second month in a row - a trend not seen since 1998. Scottish manufacturing jobs also fell as the sector continued a two-year run of letting blood.

Employers said that spare capacity and the strong chance of fresh falls in orders in the months ahead were their main motivations for slashing payrolls. Companies were also responding to another clampdown on profit margins. Input costs rose sharply in January thanks to surging fuel costs and raw material charges. Prices at the factory gate were stagnant.

The PMI report said: "Firms were generally unable to respond [to higher input costs] by increasing their average output charges in January, with strong competition again reported to have limited their pricing power."

The Scottish Executive will publish official growth figures for the end of 2002 in May.