Growth in Scotland’s private sector restrained by Omicron concerns

Scotland’s private sector recorded another upturn in activity at the end of 2021, and firms remained optimistic regarding activity over the next year, according to the latest purchasing managers’ index from Royal Bank of Scotland (RBS).

The lender’s seasonally adjusted headline business activity index – a measure of combined manufacturing and service-sector output – posted 52.7 in December, marking a steep drop from 55.9 in November.

RBS saw signs of a further rise in activity, but said it was the weakest in the current ten-month sequence of growth. Looking at specific sectors, services saw a slower rate of expansion, while factory production fell for the first time since September.

At the same time, growth of new work eased “noticeably”, with inflows of new business rising only slightly overall in the month, and inflationary pressures remained high.

Some survey respondents noted that Covid-19 concerns had weighed on client demand (file image). Picture: John Devlin.

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Inflows of new work to Scottish firms rose for the ninth month running, amid reports of improved client demand, but the rate of growth was only mild overall, while a further increase in new business at service-providers was weighed on by a marginal decline in manufacturers’ order book volumes.

December data pointed to sustained confidence at Scottish companies regarding activity over the next year, RBS added. Optimism was attributed anecdotally to hopes that Brexit and Covid-19-related issues would diminish, and demand conditions would improve.

Turning to employment, for the ninth time in as many months, Scottish private-sector companies recorded an increase during December – although the rate of job-creation was the slowest since April, and Scotland recorded a much slower upturn than the UK-wide average.

Scotland’s private sector grew at the weakest rate for ten months, notes Malcolm Buchanan, chair of the Scotland board at RBS. Picture: Gary Baker.

Additionally, as has been the case in each month since April, the level of outstanding business at Scottish firms rose, and input prices continued to rise on the back of greater fuel, transport, staff and material costs, as well as shortages, Brexit and Covid-19.

Consequently, Scottish firms again increased their charges in December, stretching the current sequence of rising output prices to 14 months, and with the rate of inflation still amongst the fastest on record and marked. As was the case for input prices, manufacturers recorded a far quicker rate of charge inflation than their service sector peers.

Hurdles

Malcolm Buchanan, chair of the Scotland board at RBS, commented: “Scotland’s private sector grew at the weakest rate for ten months, as Omicron concerns weighed on client demand, and supply issues continued to hinder companies, particularly in the manufacturing sector.

“Inflationary pressures also remained severe in December, although the latest data pointed to a slight easing of pressure, as both cost burdens and average charges increased at slightly reduced rates.

“Nonetheless, firms remained upbeat towards activity over the next 12 months, with Scottish companies expecting Covid-19-related issues to subside and demand to improve as we enter 2022.”

RBS chief economist Sebastian Burnside said: "The resurgence of the pandemic in December put the brakes on the UK's economic recovery, with each nation and region feeling the effects as people changed their behaviour in response to rising cases. But despite the similarities to previous waves, business activity levels seem to have been more resilient this time, due in part to comparatively lighter restrictions.”

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