Scotland on track for 'weak' Q4 as activity hits brakes in September, says RBS

Scotland’s private sector looks set for a weak fourth quarter, after suffering a fresh fall in output last month, according to newly unveiled data from Royal Bank of Scotland (RBS).

RBS says its headline Scotland business activity index fell to 49.3 in September, sinking under 50 for the first time since January. Picture: Getty Images/iStockphoto.

The lender has revealed that the headline Scotland business activity index fell to 49.3 in September, sinking under the no-change threshold of 50 (the reading seen in August) that separates growth from contraction for the first time since January. However, last month’s level signalled only a marginal reduction in business activity, the NatWest-owned bank said in the latest purchasing managers’ index survey out today that covers the manufacturing and service sectors.

Inflows of new work fell for the third consecutive month in September, with this index settling at 49. Firms noted that general uncertainty shrouding the economic outlook and increased borrowing costs and inflationary pressures had squeezed disposable incomes, discouraging customer activity. That said, the rate of decrease eased from August, with both sectors recording softer downturns.

Looking at business confidence, this remained strong in September, and its index was 59.2, having improved to a three-month high but still historically muted. Firms said they were expecting growth in activity stemming from hopes of improved demand conditions, launch of new products and general market growth, but also cited fears of increased competition and inflationary pressures resulting in fewer sales.

Turning to employment, an eighth monthly expansion was recorded in September, and this metric came in at 50.8. Panellists mentioned raising payroll numbers to return to pre-Covid levels, but job-creation was limited to the service sector and was marginal overall.

The level of unfinished work saw contraction for the fifth month running, and the outstanding business index was 48.5. That was in contrast to the picture for input prices that continued to rise to give a score of 62.4, and respondent firms often blamed growing cost burdens on wage inflation and material cost increases. “Though marked and strong in context of the historical data, the rate of input price inflation moderated to a 31-month low, with both sectors reporting easing cost pressures,” said RBS.

Average prices charged for the provision of private sector goods and services rose to 57.9, ticking up from August's recent low and signalling a sharp increase in output charges. Higher cost burdens fed through to greater charges, panellists noted.

Judith Cruickshank, chair of the Scotland board at RBS, commented: "The third quarter ended with a fresh contraction in business activity across Scotland’s private sector, thereby marking the first fall in output since the start of the year. The downturn in activity was unsurprising as indicated by falling demand for Scottish goods and services for the third successive month in September.

"This, coupled with historically muted expectations for the outlook for output, signals a weak fourth quarter. Whether the downturn will gain momentum or if demand trends can be reversed will be something to watch for in the coming months. In some positive news, cost burdens rose at the weakest pace in over two-and-a-half years. Cooler price pressures should eventually lead to renewed demand."

The new data from the bank comes after it in September revealed its Report on Jobs survey, one of the most authoritative studies of the subject, saying hiring conditions across Scotland deteriorated in August, with sharp decreases in both permanent placements and temp billings.