Scots private sector activity continues decline in October, showing further weakness at the start of Q4 - RBS

Scotland saw a second monthly deterioration in private sector activity last month, showing “further weakness” at the start of the final quarter of the year, according to new data.

The headline Scotland business activity index - a measure of combined manufacturing and service sector output - fell to 46.5 from 49.3 in September. Picture: Getty Images/iStockphoto.

Royal Bank of Scotland (RBS) has revealed its latest purchasing managers’ index (PMI), with the headline Scotland business activity index – a measure of combined manufacturing and service sector output – falling to 46.5 in October from 49.3 in September, indicating the sharpest decline since November 2022. It comes after the lender’s PMI report for September said Scotland was on track for a weak fourth quarter as activity hit the brakes.

The NatWest-owned bank stated that worsening underlying demand conditions and the cost-of-living crisis were said to have contributed towards the latest fall in output, which was more pronounced than that recorded for the UK as a whole.

The new business index came in at 48.2, with the rate of contraction speeding up from September, and while the Future Activity Index posted above the neutral 50 mark (above this indicates expansion and below contraction) to indicate confidence surrounding output expectations over the year ahead, the degree of optimism remained historically subdued and even weakened fractionally from the prior month. Additionally, the export climate index was 47.7, with the fastest deterioration in export conditions for nearly a year.

Turning to employment, growth in this regard remained resilient, despite deteriorating business conditions, and the 51.9 score extended the current run of expansion to nine successive months. Moreover, the rate of job-creation quickened to a five-month high, with Scotland registering the strongest performance across all 12 monitored regions and nations.

As for outstanding work, sustained falls in new business and growing staffing levels meant backlogs across Scottish firms declined in October to generate an index of 45.5. The rate of depletion was the fastest since January and stronger than that seen historically.

Cost burdens grew rapidly across Scotland during October, and firms noted that higher wages and energy prices contributed towards greater input prices, with this index settling at 61.5 last month as rising material, energy, and labour prices led firms to pass on expense burdens to customers.

Judith Cruickshank, chair of the Scotland board at RBS said: "With demand taking a step back over the last couple of months, the Scottish private sector displayed further weakness at the start of the final quarter. Spurred by sharper declines across both the manufacturing and services sector, business activity dropped at an accelerated pace in October. Nonetheless, waning demand helped to assuage inflationary pressures… That said, rising costs for raw materials and renewed pressure from rising global prices meant that cost burdens, and in turn selling prices, still rose at historically elevated rates. However, employment trends remained resilient."

RBS chief economist Sebastian Burnside commented on the UK-wide PMI data, saying: "Most regional economies remained under pressure at the start of the fourth quarter, with activity falling in nine of the 12 monitored areas.” He noted that three regions including Scotland even recorded renewed rises in employment despite greater caution more broadly around hiring in recent months, adding: “There is some stickiness in inflationary pressures, driven by ongoing wage increases and the recent resurgence in fuel prices.”