Bank of Scotland: Private sector activity in Scotland declined for the first time in six months during September 2015

EDINBURGH, 14-10-2015 — /EuropaWire/ — Private sector activity in Scotland declined for the first time in six months during September, albeit at a slow pace. The contraction was broad-based, as both the service and manufacturing sectors registered decreases in output.

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.

At 49.0, down from 50.8 in August, the seasonally adjusted headline Bank of Scotland PMI – a single-figure measure of the month-on-month change in combined manufacturing and services output – pointed to a decrease in private sector business activity in Scotland in September. That followed a five-month sequence of increasing output at Scottish private sector companies.

Manufacturing firms in Scotland reported a fall in new orders, from both the domestic and foreign markets, in September. The rate at which new business contracted was sharp and led to a deterioration in production in the sector. Anecdotal evidence suggested declining output was the result of lower demand.

Data collected from Scottish service sector companies also highlighted a contraction in activity during the month. This was despite a rise in incoming new business, which increased at the least marked rate in seven months.

Latest survey data signalled a modest expansion in headcount numbers at Scottish private sector firms. Growth was led by the service sector, while manufacturing companies registered a more modest rise in employment.

Volumes of outstanding business at Scottish private sector firms fell for the ninth successive month in September. Manufacturing businesses that reported falling work-in-hand reflected on 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.”

Component Summary

Output / Business Activity

Business activity at service sector companies in Scotland declined for the first time in six months in September. Around 23% of businesses reported lower activity compared to exactly 17% which registered an expansion. However, the overall rate of decrease was marginal. The seasonally adjusted Output Index posted below the crucial 50.0 mark for the first time in three months in September. However, the rate of decline signalled was marginal. Roughly 25% of firms noted a contraction in the level of production compared to around 22% that recorded an expansion. Scottish manufacturing companies attributed the fall in output to a downturn in new orders.

New Business

Latest survey data signalled a rise in new business at Scottish service sector companies in September, extending the current sequence of growth to seven months. Panellists linked higher new business to changes in marketing strategies and an improving property market. However, the rate of expansion in new work was slight and the weakest in this sequence. After adjusting for seasonal factors, incoming new orders at Scottish manufacturers declined during September. The rate of contraction was robust with approximately 31% of companies reporting lower new business levels, while only 20% registered higher volumes. Panellists that recorded lower new work blamed a lack of demand in the market.

Backlogs

Volumes of outstanding business in the Scottish service sector decreased again in September, albeit fractionally. This was highlighted by the seasonally adjusted Business Outstanding Index posting marginally below the neutral 50.0 threshold. Manufacturing backlogs in Scotland continued to decline in September, providing evidence of ongoing spare capacity in the sector. The rate at which outstanding business deteriorated was robust and accelerated since the previous month. Anecdotal evidence suggested the latest fall in work-in-hand was a result of declining new orders and an increase in staff levels.

Input

prices Input prices faced by Scottish service sector companies rose sharply in September. Survey participants registering higher input costs cited salary increases as one of the main factors. Purchasing prices faced by Scottish manufacturers fell in September. Moreover, the rate at which input prices declined was the fastest since March 1999. Anecdotal evidence suggested falling cost burdens was a consequence of lower raw material prices.

Output prices

Despite average prices rising, output charges in Scotland’s service sector fell for the second month in succession in September. The rate in which prices were discounted accelerated, yet remained modest overall. Falling output prices were linked to a combination of stronger competition in the market and reduced demand. Downward pressure on average selling prices set by manufacturing businesses in Scotland continued in September. The pace at which charges were discounted was the fastest in five months. Average tariffs have decreased in every month since February.

Employment

Despite a fall in business activity, service sector companies continued to add to their workforces in September. Moreover, the rate of increase quickened from the previous survey period. Anecdotal evidence suggested that the latest rise in employment was due to the opening of new offices. Workforce numbers at manufacturing firms in Scotland also continued to increase in September. Employment levels have increased steadily throughout the last three survey periods. However, the rate of headcount growth in the latest period was fractional and eased since August.

The Bank of Scotland PMI is compiled by Markit for Bank of Scotland and is based on data compiled from monthly replies to questionnaires sent to purchasing executives in around 600 private manufacturing and service sector companies. The panel has been carefully selected to accurately replicate the true structure of the Scottish economy.

Survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month. For each of the indicators the ‘Report’ shows the percentage reporting each response, the net difference between the number of higher/better responses and lower/worse responses, and the ‘diffusion’ index. This index is the sum of the positive responses plus a half of those responding ‘the same’.

Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change. An index reading above 50 indicates an overall increase in that variable, below 50 an overall decrease.

Markit do not revise underlying survey data after first publication, but seasonal adjustment factors may be revised from time to time as appropriate which will affect the seasonally adjusted data series. Historical data relating to the underlying (unadjusted) numbers, first published seasonally adjusted series and subsequently revised data are available to subscribers from Markit. Please contact economics@markit.com.

About Bank of Scotland
Bank of Scotland is part of Lloyds Banking Group, the UK’s largest retail bank and Scotland’s largest financial services employer. Established in 1695, Bank of Scotland is the UK’s oldest surviving clearing bank. Our goal is to be the best financial services provider in Scotland. We believe this means we must build a leadership position not on the basis of scale but on the foundations of reputation and recommendation.

About Markit
Markit is a leading global diversified provider of financial information services. We provide products that enhance transparency, reduce risk and improve operational efficiency. Our customers include banks, hedge funds, asset managers, central banks, regulators, auditors, fund administrators and insurance companies. Founded in 2003, we employ approximately 4,000 people in 11 countries. Markit shares are listed on NASDAQ under the symbol MRKT. For more information, please see www.markit.com

For further information, contact:
Zoe Redhead, Bank of Scotland Press Office
Tel: 0131 655 5405
Email: zoeredhead@bankofscotland.co.uk

For technical enquiries, contact:
Markit
Samuel Agass,
Economist
Tel: 01491 461 006
Email: samuel.agass@markit.com

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