Which sectors have been driving growth as Royal Bank of Scotland releases latest snapshot of Scottish economy

Private sector firms across Scotland and the UK as a whole are positive over their outlook for the coming year despite a patchy performance last month, according to information published today.

Royal Bank of Scotland (RBS) has unveiled its latest growth trackers for both areas, with the Scottish version showing optimism among firms despite the headline business activity index ticking down to a five-month low of 51.9 in June, from 55.2 in May, “reflecting the recent cooldown in service sector activity”.

The lender – which last month said it was buying Edinburgh-based Sainsbury’s Bank – said the slowdown in private sector output north of the Border was accompanied by a fresh fall in new business, which was the first recorded in five months, and this index came in at 48.8 for June. A reading above 50 signals growth, and below contraction.

Employment rose in the latest survey period to a reading of 50.5, but at the second-weakest rate since the current run of expansion began in February 2023, and outstanding business clocked in at 47.1, with businesses reducing their backlogs solidly in June after a brief expansion the previous month.

However, inflationary pressures continued to subside as cost burdens rose at the weakest rate in 40 months, with the input prices index reaching 58.4, while the prices charged equivalent scored 52.9, and at a rate of increase that was the joint softest in 40 months.

RBS added that projections for the year-ahead outlook across Scotland remained optimistic and broadly in line with the long-run average trend in June, despite easing slightly on the month – with a business expectations reading of 62.3. “Businesses were hopeful that demand conditions would improve in the coming months, and planned to raise their advertising and investment,” said the lender.

The latest Addleshaw Goddard Scottish business monitor report, produced with the University of Strathclyde’s Fraser of Allander Institute, showed that more than a quarter of the 330 or so Scottish businesses polled in Q2 said they expected to see moderate or strong growth in the economy over the next 12 months, up from the 19 per cent figure seen in the first three months of this year.

Hotels, restaurants, and catering, was found to be one of the sectors with a greater economic footprint in Scotland than in the UK as a whole. Picture: Scott Louden.

Judith Cruickshank, chair of the Scotland board at RBS, touched on private sector activity during the latest survey period, adding: “While the upturn lost momentum, as the service sector observed a notable cooldown in June, the ongoing downturn in the manufacturing sector showed further signs of easing as output was broadly stable, and the downturn in new orders moderated.”

The report also examined sector specialisation in Scotland, and has calculated “location quotients” (LQs) that can identify industry clusters at a local level – with an LQ greater than 1 indicating that the sector has a greater economic footprint in the region than it does for the UK as a whole.

Manufacturing sub-sectors in Scotland to have exceeded this threshold comprise food and drink (1.89), mechanical engineering (1.15), textiles and clothing (1.13), and electrical and optical, and timber and paper (both scoring 1.04). In services, they are personal and community services (1.24), hotels, restaurants, and catering (1.22), and transport and communication (1.02).

Such findings form part of RBS parent company NatWest’s UK-wide regional growth tracker, also published today, which has uncovered business activity having grown in nine out of 12 monitored nations and regions (including Scotland) in June, a retreat from when the whole dozen enjoyed an increase the previous month.

RBS said its latest Scotland growth tracker 'signalled modest gains in private sector activity'. Picture: Jane Barlow/PA Wire.

The lender found that the strongest rise in business activity in June was recorded in London (56.1), which “went against the general trend and saw growth accelerate from the month before”. Additionally, the number of nations and regions recording higher inflows of new business fell to six in June (the fewest since January) from 11 in May.

In terms of outlook, business expectations towards activity over the coming year remained positive, but in most cases weakened last month. Looking at employment, most areas recorded an increase in the latest survey, although rates of job-creation were often only modest.

Backlogs of work fell almost universally across the UK in June, while Scotland was one of two areas, along with South-east England, to record the slowest overall rises in input costs. Looking at the other side of the cost coin, June saw businesses across the UK raise prices charged for goods and services as they looked to pass on higher costs to customers. Furthermore, rates of output price inflation ticked up in the majority of cases, and tended to be above their long-run averages.

Sebastian Burnside, NatWest chief economist, said: "Our regional growth tracker shows that most parts of the UK continued to see business activity expand in June, with one or two pockets of real strength.

"Demand conditions varied across the UK in June. The number of nations and regions reporting growth in new business fell, although this masked some stronger performances, especially in Northern Ireland and London, but also in the North-west and South-west [of England].

"Business expectations took a bit of a hit almost universally in June, reflecting uncertainty ahead of the general election. Encouragingly, however, most areas saw employment rise as businesses continue to forecast growth in activity over the coming year. An acceleration in output charge inflation across most parts of the UK in June shows continued stickiness in prices, which might give policymakers some pause for thought on interest rate cuts."

Recent revised data from the Office for National Statistics showed that UK gross domestic product grew by 0.7 per cent between January and March of this year, with the country’s recovery from a recession in the latter half of 2023 stronger than previously thought. “While hotter-than-expected growth doesn’t help those looking for a faster route to cutting interest rates, it does help to boost overall optimism,” Sophie Lund-Yates of Hargreaves Lansdown said at the time.