SCOTTISH private sector output fell for a fifth consecutive month in December but the rate of decline slowed sharply, while employment decreased for the first time in 21 months, a survey shows.

The fall in employment, which was marginal, was driven by the services sector, with manufacturing overall showing a slight rise in headcount.

The business activity index in Royal Bank of Scotland’s purchasing managers’ index survey – a composite measure of manufacturing and services sector output – rose from 43.9 in November to 48.3 in December on a seasonally adjusted basis.

While it remained significantly below the 50 no-change mark, the increase in the index indicated a marked slowing of the pace of decline between November and December.

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Confidence among Scottish companies, about the prospects for increased business activity in a year's time, fell for a second consecutive month in December.

Noting the latest optimism reading was the “second-weakest in 31 months and comfortably below the historical average”, Royal Bank said: “The war in Ukraine, a slowdown in the housing market and inflation weighed heavily on confidence.”

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In the UK as a whole, employment in the private sector economy fell in December for the first time in 22 months, Royal Bank observed.

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Judith Cruickshank, who chairs Royal Bank’s Scotland board, said: “The Scottish private sector recorded another grim performance during December. Client appetite suffered as various economic headwinds continued to dominate the business environment. That said, the downturn across Scotland visibly eased from November, as both private sector output and new work received fell at softer paces.

“Moreover, the loss in demand helped to relieve price pressures, with slower rates of inflation seen for both input costs and output charges. Nonetheless, these remain well above their respective historical averages.”

She added: “As we move into 2023, it will be important as to how firms adjust to demand shortfalls. We have already noticed the first reduction in employment since March 2021. Moreover, amid a high inflation and interest rate environment, it will be difficult to revive demand and thus will be the primary concern for businesses.”