Private sector growth slows to 20-month low

Group Business Correspondent

Monday 10 September 2012

SCOTLAND's private sector recorded only marginal growth in August as economic uncertainty took a toll on firms in areas such as manufacturing and leisure, a key survey shows.

DOWNWARD SLUMP: The manufacturing sector saw its sharpest fall in new orders in nearly three-and-a-half years. Picture: Christopher Furlong/Getty

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MARK WILLIAMSON

The latest Purchasing Managers Index from Bank of Scotland shows the growth rate slowed to a 20-month low last month when the country's fragile recovery lost further momentum.

The headline index reading fell for the second month running, from 51 in July to 50.3 in August. A mark of 50 separates expansion from contraction.

"The Scottish economy is struggling to maintain growth momentum in this latest slowdown," said Donald MacRae, chief economist at Bank of Scotland. Businesses in all sectors suffered from a fall in new orders in the month but the downturn hit some industries especially hard.The manufacturing sector, which ministers hope will help make Scotland less reliant on financial services, suffered the sharpest fall in new orders for nearly three-and-a-half years.With respondents highlighting a drop in new orders from clients in the embattled eurozone, manufacturers shed jobs after three months of growth.Businesses in the travel, tourism and leisure sector also reported a drop in activity. Operations that rely on discretionary spending by consumers have been facing tough conditions. The fact that Scotland managed to record a 20th successive month of growth overall in August was largely due to a relatively strong showing by the financial services sector, whose activity index reading was at 55, compared to 56.3 in July.However, while firms in the sub- sector increased activity, the supply of new business needed to keep them busy in future appeared to be drying up last month. The sub-sector's employment reading fell to 48.8 from 52.4.Financial services firms reduced headcounts overall, suggesting they are feeling increasingly cautious about the outlook. Firms in all sectors reported the costs of inputs such as fuel increased sharply.The PMI findings may cast fresh doubt on hopes that growth in the private sector will outweigh the effects of deep cuts in spending proposed by the UK Government.Scotland re-entered recession in the first three months of 2012, with a second successive quarterly fall in output. The Scottish Government will release second- quarter figures on October 17. "Job creation across the Scottish private economy slowed to only a marginal place in August," said Bank of Scotland.The bank highlighted the fact the growth rate in Scotland was "well below" the UK-wide average in August. The reading for the headline index increased to 52.6 in the UK from 49.4 in July.However, BDO said confidence levels hit a 20-year low in the UK last month. The accountancy firm's Optimism Index fell from 93.1 in July to 89.1 in August, the lowest level since comparable figures were first collected in 1992. Neil Craig, head of BDO in Scotland, said: "The Government's efforts to cut current spending may not be working out quite as planned, though we believe that the strategy in essence remains correct. But we have long been concerned that the cuts to investment spending were too drastic and that steps to redress this have been taken too slowly."The new business minister at Westminster, Michael Fallon, was reported at the weekend to be planning to scrap 3000 regulations to help small and medium- sized enterprises. However, Business Secretary Vince Cable said regulation would only be cut "in a rational way" and without badly downgrading protection for employees and the environment.The output index for manufacturing in Scotland fell to 45.8 in August, from 46 in July. The services activity index slipped to 51.9 from 52.7 in July.The travel, tourism and leisure activity index fell to 49.5, from 50.6. However, sector players increased employment, with a reading of 52.7. Firms in business services, such as consultants, also increased employment, with a reading of 53.The composite employment index eased to 51.1 from 51.4 in July.

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Private sector growth slows to 20-month low

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