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Manufacturers facing squeeze

Scottish economy shows ‘marginal’ return to growth

Wireline industryThe Scottish economy showed a return to growth last month, driven by a slight increase in new business, although the rate of growth was only marginal.

It came in spite of job losses for the first time in five months.

The seasonally adjusted headline Bank of Scotland PMI – a single-figure measure of the month-on-month change in combined manufacturing and services output – scored 50.3 in December, up from 49.8 recorded in November.

The latest figure signalled a fractional improvement in output in Scotland’s private sector. This rise was led by service providers, as manufacturers registered a further decline in production.

While the service sector reported a modest expansion in new work, manufacturing companies registered a solid contraction in incoming new orders.

While staffing contracted, the rate of job shedding was weak. Manufacturers linked falling employee numbers to necessary redundancies.

There was a further deterioration in outstanding business volumes in December. The latest decline extended the current sequence of backlog depletion to 12 successive months. There was evidence that a fall in work-in-hand reflected efforts to cut delayed projects.

There was also a further increase in input costs in December, continuing the current sequence of price rises which started in January 1999.

The rate of inflation was solid, but dampened by a drop in input prices at Scottish goods producers. Despite higher average cost burdens, output prices fell for the fifth month running. Moreover, the drop in charges was broad-based by sector.

Alasdair Gardner, Bank of Scotland regional managing director Scotland – commercial banking, said: “Despite returning to expansion territory, Scottish manufacturers struggled to cope with a lack of new orders from both domestic and foreign markets.

“This acted as a brake on overall output growth. On a positive note, service providers showed signs of economic optimism, with headcounts and new business levels expanding. However, these improvements were marginal, and insufficient to propel the economy in a higher gear at the end of 2015.”

>> A survey from accountants and business advisers BDO reveals that consumers in Scotland are enjoying their best start to the year since the financial crisis and are contributing to an upbeat business outlook despite increasingly depressed global economic concerns.

BDO’s employment index, which indicates firms’ intentions to hire, is still on a downward trend but remains positive at 105.1. This suggests that employment will continue to increase over the coming months, albeit at a slower rate.

Rising wages are also contributing to the country’s buoyant consumer outlook, with total pay packages up 2.4%, according to the latest ONS labour market figures. The introduction of the National Living Wage is also set to give those on the lowest incomes a welcome boost this April.

Coupled with low prices rises (the Consumer Prices Index rose by 0.1% in the year to November 2015) consumers should have more disposable cash in 2016. Businesses are benefiting from low price rises too with the BDO Inflation Index remaining at 96.4 for the second month running.

BDO says this consumer power is protecting Scottish business confidence, at least in the short term, from global headwinds. BDO’s Optimism Index – which predicts growth six months ahead – remains above the long term trend at 100.5 although this is also on the slide from a high of 104.9 in November 2014.

Martin Gill BDOCommenting on the findings, Martin Gill (right), Scottish head of BDO, said: “It is clear that consumers are benefiting from the continued economic recovery which has lead to strong employment figures, low inflation and rising wages.

“This is boosting Scotland’s businesses as they too benefit from the low inflation rate and continued falling fuel prices. The result has been to offset the negative impact of the downward trends in the wider global economy.

“However, there is no room for complacency, and the Scottish and UK governments need to protect economic growth by encouraging and focusing on business investment. There is also likely to be an increase in base rates this year which may dent consumer confidence in the coming months. We will also need to see whether next Wednesday’s Scottish GDP figures indicate continued growth in the economy.

“”Initiatives such as raising the annual investment allowance would provide a greater incentive for companies to innovate and help to insulate the UK economy from risks abroad.”

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