How Scots appetite for coffee and cocktails has boosted Scottish private sector in first half of 2024

“Growth in the service sector was again able to mask the downturn at manufacturers, with service firms noting improving underlying demand trends.”

The Scottish private sector signalled a solid start to the second half of the year, but very much in a two-speed race, with services firms (encompassing, say, bars and cafes) and manufacturers experiencing differing fortunes, according to a new report from Royal Bank of Scotland (RBS).

The NatWest-owned lender has unveiled its latest regional growth tracker data, which it said pointed to a solid rise in private sector activity in July. The headline business activity index registered above the 50 no-change threshold for a seventh month running last month, ticking up to 52.7, from a five-month low in 51.9 in June, broadly in line with the broader UK trend.

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The rate of increase picked up from June, supported by a renewed expansion in the inflows of new work, but the increase in activity was again centred at service firms (which make up more than 80 per cent of the UK economy), and goods-producers recorded a further drop in output.

Service firms have been noting improving underlying demand trends (file image). Picture: Scott Louden.Service firms have been noting improving underlying demand trends (file image). Picture: Scott Louden.
Service firms have been noting improving underlying demand trends (file image). Picture: Scott Louden.

Sentiment for the year-ahead outlook for activity remained strongly optimistic in July, and polled firms north of the Border were more confident than in June, with both underlying sectors recording an uptick. Sentiment was driven by hopes of improving market conditions, growth in new customers, product-diversification, and plans of implementing new business processes, said the lender.

A fresh rise in new business was recorded across the Scottish private sector last month, with expansions now noted in five of the last six survey periods, but growth was centred at the service sector, with businesses reporting stronger demand from existing clients. Meanwhile, goods-producers posted a contraction for a 16th straight month.

When compared to demand conditions across the UK as a whole, Scottish firms underperformed, and of the 12 monitored UK nations and regions, Scotland was the second-least optimistic, ahead of only Northern Ireland.

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RBS added that July data signalled an 18th consecutive monthly rise in staffing levels across the Scottish private sector, with the rate of growth picking up from June's 11-month low to signal a “modest uptick”. However, as has been the case since March, job-creation was limited to service-providers (which as well as leisure and cultural activities includes retail and the business and finance sectors), where strong demand was said to have supported hiring activity. And the rate of overall job-creation measured for Scotland slipped below the UK-wide average for the first time in 12 months.

In addition, both service-providers and manufacturers were able to keep on top of their workloads during July. Backlogs depleted sharply overall and to the greatest extent in 18 months, and of the 12 monitored tracked regions and nations, only Wales recorded a stronger rate of backlog depletion.

RBS also found that Scottish private sector firms noted increasing pressures stemming from inputs in July. In fact, the rate of inflation ticked up after hitting a 40-month low in June and surpassed the UK-wide average, with higher supplier and freight charges, plus wages and material prices, all said to have underpinned the uptick in costs.

Similarly, charges levied for Scottish goods and services were also raised at a slightly stronger pace in July; higher input costs were highlighted as the primary driver of increased output charges. However, Scotland saw charges rise at the second-weakest pace of all monitored UK regions and nations.

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Judith Cruickshank, chair of the Scotland board at RBS, commented: "The Scottish private sector signalled a solid start to the second half of the year, backed up by a strongly performing service sector. Growth in the service sector was again able to mask the downturn at manufacturers, with service firms noting improving underlying demand trends.

"Moreover, optimism towards the year ahead outlook was firmly optimistic, as confidence levels strengthened on the month. Private sector employment also ticked up in July, the rate of job creation quickening from June. Meanwhile, inflationary pressures intensified during the latest survey period and could pose a concern to firms in the coming months."

NatWest in July reported that it had generated a pre-tax operating profit of £3 billion for the six months to the end of June, 16 per cent down on a year earlier, but a stronger result than had been expected in the City.

A separate report published last month by accountancy trade body ICAEW found that business confidence in Scotland had increased marginally in the second quarter of 2024 to 15.6 on the index, up from 15.4 the previous quarter and ahead of the historical average. “Although confidence is behind the UK average, Scottish businesses expect to outpace other nations and regions in the year ahead. Exports are forecast to rise by 6.3 per cent year on year, while domestic sales are set to grow by a similar amount,” it found.

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David Bond, ICAEW director for Scotland, said: “It’s encouraging that business confidence in Scotland has reached a two-year high, although sentiment lags the UK average. Nevertheless, companies are bullish about the prospects for exports and domestic sales in the year ahead.

“Scottish companies continue to face a number of growing challenges, with the number of firms citing regulatory requirements hitting its highest-ever figure. The new Westminster government must work closely with lawmakers at Holyrood to deliver on its manifesto promise to unlock stronger economic growth and deliver a prosperous and productive UK economy.”

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