Private sector goes back into expansion territory

Octobers rebound was driven by strong growth in service businesses. Picture: Craig Stephen

The Bank of Scotland’s latest purchasing managers’ index (PMI), published today, found that October’s rebound was driven by strong growth in service businesses such as retailers, restaurants and banks.

The level of new work placed with businesses touched a three-month high, but new orders in the manufacturing sector continued to fall due to weakness in export sales, the bank said.

Its monthly report collects information from 600 companies operating in the manufacturing and service sectors and provides a valuable snapshot of private sector activity, which accounts for roughly half of the Scottish economy.

The seasonally adjusted headline index – a single-figure measure of the month-on-month change in combined manufacturing and services output – rebounded to 54.2 last month, from an 18-month low of 51.5 in September.

Donald MacRae, chief economist at Bank of Scotland, said the growth followed a “referendum-induced low” the previous month.

“Both services and manufacturing sectors recorded growth, with a welcome increase in the level of new business particularly in financial services,” he noted.

“But the level of new export orders at manufacturers fell for the fourth month in succession, illustrating the effect of the slowdown in the eurozone.

“The Scottish economic recovery continues but at a reduced rate compared to the first half of the year.”

The rate of job creation eased to a ten-month low as businesses reported being able to keep on top of their workloads.

Despite this, staffing levels at service firms have now increased for 29 months in a row, according to the PMI survey.

Job creation at manufacturing businesses also picked up slightly in October, although was still below highs recorded earlier in the year.

Welcoming the findings, a spokeswoman for the Scottish Government said: “The pace of growth accelerated compared to the previous month, in contrast with the UK where it slowed down.

“In Scotland, the pick-up in growth in October was broad-based across both services and manufacturing, with the pace of expansion in services activity at a three-month high. Alongside this, the survey also signalled continued employment growth across the services and manufacturing sectors.

“However, the PMI also highlights that conditions for manufacturing exporters remain challenging with the weaker outlook in Scotland’s key export market, the eurozone.”

A separate report out today highlights the risk to consumer spending, investment and jobs from a falling inflation rate, with the possibility of deflation in the new year. BDO’s “business trends” survey notes that weakening global demand caused input prices for firms to take another step towards deflation in October.

Martin Gill, head of BDO in Scotland, said: “Policymakers need to realise that there are far more significant downside risks for growth than there were three months ago.”

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