Scottish recovery runs out of steam but employment holds up

The findings come from the authoritative Bank of Scotland PMI, an index which measures the overall change in output month by month, with readings above 50 signifying expansion.

August saw the PMI decline from 50.8 to 49.0, following a five-month sequence of 50-plus readings. However, the August index had given warning of slowdown, with all the main indicators behind July’s levels including even the normally buoyant tourism and leisure sector.

The index’s previous reverses were in March (49.4) and January (47.7) and it reached 52.2 in July. However the trend has been mirrored in the UK as a whole, with the its PMI falling equally sharply last month from 55.2 to 53.3.

Meanwhile the UK economy is set to post continuing solid growth rates over the next three years, according to the EY Item Club autumn forecast published today. But it says a combination of rising inflation and a tightening fiscal policy will see consumer spending growth slow from 3per cent in 2015 to 2.1per cent in 2017, which means business investment and productivity will have to take up the slack.

Peter Spencer, chief economic advisor to the Item Club, says future growth will “depend heavily on hard-won productivity gains rather than the easy wins from energy and commodity price falls that have played an important role in supporting demand so far”.

The PMI Scotland survey shows volumes of new business fell at a marginal pace in September, while backlogs of work also declined. Despite this, workforce numbers expanded at an accelerated rate.

In manufacturing, the seasonally adjusted output index posted below the crucial 50 mark for the first time in three months in September. However, the rate of decline was marginal. Roughly 25per cent of firms noted a contraction in the level of production, citing a downturn in new orders from both home and overseas markets, while around 22per cent reported expansion.

Workforce numbers in the sector continued to increase in September, for the fourth successive month, though the rate of headcount growth in the latest period was fractional and has eased since August.

In the service sector, business activity slowed down for the first time since March. Around 23per cent of businesses reported lower activity while only 17per cent which registered an expansion. Contractions in business services and the travel, tourism and leisure sectors offset growth in financial services, though the overall rate of decrease was marginal. Moreover, service sector companies continued to add to their workforces in September and a a quicker pace than the previous month. Anecdotal evidence suggested that the latest rise in employment was due to the opening of new offices.

There was a rise in incoming new business, but it increased at the least marked rate in seven months.

Volumes of outstanding business at Scottish private sector firms fell for the ninth successive month. Manufacturing businesses that reported falling work-in-hand cited a combination of lower orders and higher staffing levels.

Cost burdens increased in September, with the rate of inflation accelerating from August. While service sector companies reported higher input costs, manufacturing firms faced sharp reductions in prices, softening the overall rise in input prices.

Meanwhile, output prices fell again during the month. Moreover, the rate of decrease quickened from the previous survey period. Price discounting was linked to increased competition in the market.

Donald MacRae, Chief Economist at Bank of Scotland, said: “September’s PMI showed a broad-based decline in economic activity across both service and manufacturing sectors. New export orders fell for the eighth month in a row. The slowdown in the Scottish economy identified in summer has taken further hold in the month of September but employment intentions suggest a return to moderate growth in coming months.”