Scotland’s private sector is growing, but weaknesses remain

The latest purchasing manager’s index (PMI), published today by Bank of Scotland, shows firms eked out growth thanks to an expansion in the services sector – but it was mostly a result of progress on backlogs rather than new orders, and almost no jobs were created.

Donald MacRae, chief economist at Bank of Scotland, said the deterioration in the Scottish economy identified by the survey in the summer months had been arrested, but there are few signs yet of a sustained recovery.

“Manufacturing output fell in the month but at a much slower pace than in September, indicating a recovery from the dip in output felt from July to September,” he added.

October’s index came in at 50.7 – a score above 50 indicates economic growth. It comes after September’s reading of 49.6 suggested private sector output suffered its first fall in nearly two years, dragged down by a sharp drop in new orders for manufactured goods.

The bank’s latest report shows that overall business conditions across the Scottish private sector economy changed very little at the start of the fourth quarter. Employment was virtually unchanged, while inflationary pressures were strong but largely absorbed by firms due to intense competition for work.

The data showed that growth of output in Scotland was largely supported through work on outstanding business, as the volume of new work received was broadly unchanged in October following three straight months of decline.

Meanwhile, manufacturers recorded a further drop in new export orders, citing reduced demand in European markets in particular. That was reflected in job losses, offset by marginal recruitment in the services sector.

Scotland has so far not followed the wider UK economy into technical recession this year, but does not seem to have matched its robust bounce-back in the third quarter either.

Most economists believe that official figures showing UK gross domestic product increased by 1 per cent in the three months to September overstated its underlying economic strengths.

A Scottish Government spokesman called on Westminster to increase capital spending by £5 billion.

And he said: “The Scottish Government and our enterprise agencies remain focused on strengthening the economy through securing new investment and jobs.

“The latest PMI reports that there has been growth in private sector activity in Scotland in October, while the UK as a whole has seen a small contraction.”

Data from recent weeks has been mixed, but a report by accountancy firm BDO released today shows British business confidence rallied in October.

The firm’s output and optimism indicators were higher for a second consecutive month, suggesting short-term signs of improvement, although both measures remain below the level that would forecast growth for the coming months.

Neil Craig, head of BDO in Scotland, said there was cause for “cautious optimism”. But he warned the manufacturing sector – which had at one time carried the nation’s hopes of an export-led recovery – is struggling.

“UK manufacturers in particular are fearful for the future,” he said. “We hope the Chancellor’s Autumn Statement will set out concrete plans for a UK Business Bank to add to the UK government’s other growth initiatives.”