Shock rebound in Scotland's private sector output but 'things are not back to normal'

Scotland’s private sector returned to growth last month amid a lockdown bounceback but “things are not back to normal”, according to the latest snapshot from Royal Bank of Scotland.

Malcolm Buchanan, chair, Scotland board at Royal Bank of Scotland, which released the purchasing managers index report. Picture: Gary Baker

Releasing its purchasing managers’ index (PMI) for August, RBS said business activity had risen at the quickest pace for more than six years amid the fastest uptick in new work since late 2018.

The seasonally adjusted headline business activity index – a measure of combined manufacturing and service sector output – rose to 55.8 in August from 49.3 in July, to signal the first increase in Scottish private sector output since February.

Growth was broad-based at the sector level, although uneven, RBS noted, as manufacturers registered noticeably sharper increases in both output and order book volumes than service providers.

Adjusted for seasonal factors, the new business index posted above the 50 threshold separating growth from contraction for the first time in six months during August to signal an increase in new work at Scottish firms.

Moreover, the rate of expansion was the quickest since October 2018. The easing of lockdown measures and improved client demand were frequently associated by panellists to the rise.

However, the latest data highlighted a seventh consecutive monthly reduction in private sector employment across Scotland.

There were further reports of redundancies and layoffs among businesses, with respondents in some sectors linking job cuts with still-muted demand and a weak outlook. The rate of job shedding was the slowest since February, but still sharp, the bank added.

At the sector level, the reduction in staff numbers was broad-based. Service firms registered a sharper reduction than manufacturers.

Malcolm Buchanan, chair, Scotland board at Royal Bank of Scotland, said: “The Scottish private sector showed some very encouraging signs in August.

“Business activity rose at the quickest rate since July 2014 and new orders increased for the first time since February, amid reports that looser lockdown restrictions had allowed the economy to reopen and released pent-up client demand.

“Still, things are not back to normal. Capacity pressures remained weak and, as a result, firms made further cuts to their workforces. The rate of job shedding remained sharp, despite easing further from April’s record.

“Although data provided positive signs that the recovery is beginning, ongoing improvements in demand conditions are needed to ensure it keeps momentum.”

Cost burdens facing Scottish firms rose again in August, extending the current sequence of increase to three months. Respondents pointed to greater fuel and staff costs, unfavourable exchange rates and higher prices at suppliers.

Meanwhile, there may be more potential benefits from the Covid-19 crisis than from Brexit according to a survey of some 300 Scottish small and medium-sized enterprises (SMEs).

The research, carried out by Business Gateway, identified that although the pandemic is a concern for more than three-quarters of businesses (78 per cent), about half (52 per cent) anticipate some positive changes. These included more efficient working practices and greater resilience to the impacts of future pandemics. That compares with the 38 per cent of firms that expect positive outcomes from Brexit.

Steven Heddle, chair of the Business Gateway board, said: “Market conditions for Scottish businesses have never been more difficult. Many are still attempting to shore up resilience and survive the pandemic, while also preparing for significant trade disruptions following Brexit.”

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