Scotland's private sector economy has shrunk for the second time in two consecutive months and marked the steepest decline in almost a decade.
Scotland's private sector economy has shrunk for the second time in two consecutive months and marked the steepest decline in almost a decade, amid the squeeze of the global credit crisis and skyrocketing oil prices.
The latest edition of the closely-watched Purchasing Managers Index, compiled by Royal Bank of Scotland, revealed that overall economic activity in Scotland's private sector fell in May largely because of lower levels of new business - a condition triggered by consumer uncertainty and weakness in the financial and property markets.
The PMI, which is published today, noted that Scottish private sector activity declined for the second month in a row in May, and the rate of contraction picked up to its fastest since October 1998.
The survey index for overall Scottish private sector output fell to 46.8 last month, down from 48.3 in April. A reading above 50 denotes expansion, a sub-50 score marks contraction.
This latest PMI analysis also chimes with the Ernst & Young Scottish ITEM Club summer update, published yesterday, which highlighted that growth in Scotland this year was now expected to fall to 1.5%, while edging up to just 1.6% in 2009.
The Bank of Scotland's influential Index of Leading Economic Indicators also suggested last week that Scotland's 2008 growth rate would come in below the 2% trend.
This is compared with growth of 1.8% forecast for the UK as a whole this year, and 1.5% growth next year - slightly below that of Scotland.
David Fenton, Royal Bank of Scotland's head of microeconomics, said: "Business conditions took a turn for the worse in May.
"Slower demand and higher costs are an uncomfortable combination for Scottish companies."
The PMI provides the most stark evidence yet that Scotland is far from immune to the economic slowdown in the US and much of Europe, and that specific evils such the global credit crisis, surging oil prices and the UK housing slowdown have already begun to gnaw ferociously at the economy north of the border.
Exacerbating the troubles for companies are the steady erosion of consumer spending power and soaring costs for food and petrol, which all conspired to depress demand.
At the same time, the volume of incoming new work fell for the third consecutive month, while firms' average input costs increased at a new survey record rate.
The softening of market demand indicated by the latest fall in new business resulted in spare capacity at Scottish firms in May, as outstanding business declined at the fastest rate in more than five years.
Backlogs also fell sharply at both manufacturers and service providers, the survey noted.
However, haulage companies, airlines and car owners are no longer the only ones being squeezed by the ever-mounting price of crude, which shot up almost $11 a barrel on Friday alone, to a record $138.54.
The PMI noted that firms' input costs in May increased at the fastest rate in the survey history, with the rate of inflation sharpening for the third successive month.
The rising price of oil was reported to be the overriding factor behind higher prices, feeding through to chemicals and fuel, while metals and foodstuffs were also commonly reported to have increased in price.
All companies that make goods from raw materials derived from oil are now watching their costs rocket, and they find themselves forced into unpleasant choices - should they raise prices, shift to less costly procedures, cut workers, or all three?
Many Scottish companies have been pushed to raise prices and manoeuvre aggressively to offset the rising cost of raw goods made from petrochemicals such as plastics.
Higher energy costs hurt businesses and consumers alike, and add to the woes of economies already smarting from a housing slump and the financial crisis.
Some economic theorists have argued that higher energy prices discourage consumers from spending on other products, which in turn slows growth.
With no indication that oil and commodities prices are going to ease in the near future, the report points to tough times for almost all the key areas in Scotland's private sector economy.
Meanwhile, output levels plunged in both services and manufacturing - with manufacturing falling the faster of the two.
The survey also noted that prices charged by Scottish companies increased at a marked rate in May that was little-changed from the previous two months.
Though strong, the data indicated that margins were under pressure as input cost inflation accelerated but output prices rose at a broadly similar rate.
At the same time, the overall contraction reflected lower service-sector employment numbers, but conversely the number of manufacturing jobs rose for the twelfth month running.
The overall May decline in Scotland, however, was in line with the fall across the UK - although the decline was still steeper north of the border, with UK output activity tumbling to 49.8, compared with 40.8 the previous month.
Royal Bank's Fenton added: "With little prospect of further rate cuts from the MPC in 2008, companies will have to make the best of a fairly difficult situation."
