Why Scotland’s private sector suffered an end-of-year collapse in output

Scotland’s private sector ended 2024 on a sour note after a sharp contraction in output.

Releasing its latest monthly growth tracker, Royal Bank of Scotland noted that the decline marked the most significant drop in activity since October 2023. Both the manufacturing sector and the services industry reported a decrease in output.

The tracker - a seasonally adjusted index that measures the month-on-month change in the combined output of the country’s manufacturing and service sectors - fell below the neutral level of 50 for the first time in a year, recording 46.9 in December, down from 51.1 in November.

Both the manufacturing sector and the services industry reported a decrease in output in the latest RBS tracker.

The bank said contributing factors to the fall included reduced business activity, redundancies and the non-replacement of voluntary leavers.

Meanwhile, the outlook for activity became more restrained in December. Although the respective index remained above the neutral level of 50, it fell to its lowest point in two years. Recent policy changes, particularly regarding employment, along with the current economic environment, contributed to this tempered outlook, RBS added.

Judith Cruickshank, chair, Scotland board, Royal Bank of Scotland, said: “Following an impressive 11-month growth period, during which the average growth tracker reading was 52.5, 2024 ended with a renewed decline in activity across Scotland’s private sector. New business decreased for the third consecutive month, prompting companies to adopt a more cautious outlook for 2025. Additionally, there has been a resurgence in job cuts, as firms align their staffing levels with reduced business demands.

“Price pressures have remained largely unchanged, with input price inflation in line with the long-run trend but output charges increasing at a historically high rate, indicating a persistent challenge regarding overall inflation.”

The downturn in activity north of the Border stood in contrast to the ongoing, albeit softening, growth trend observed across the UK as a whole. Notably, Scotland, along with the north west of England, experienced the fastest declines in private sector activity among the 12 monitored regions and nations.

New business at Scottish private sector companies fell in each month of the final quarter of 2024, a shift from the growth seen during the third quarter. The rate of decrease was “mild and broadly consistent” during the closing quarter of last year. It was also in line with that recorded for the UK as a whole. Where new orders fell, firms cited a loss of major customers and the ongoing economic slowdown as factors.

Regarding the business outlook for the year ahead, Scotland ranked the lowest among the 12 nations and regions being monitored.

The rate of decrease in employment was said to be modest, primarily driven by a downturn in manufacturing. At the same time, job creation in service firms continued to cool. Contributing factors included reduced business activity, redundancies and the non-replacement of voluntary leavers. However, the rate of job reduction at the UK level exceeded that recorded in Scotland.

RBS said recent data indicated spare capacity among private sector businesses in Scotland, highlighted by another month of declining backlogs.

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