PMI: Private sector output drops as orders decline

Manufacturers saw orders fall

Scotland's private sector has suffered a drop in output for the fifth time in six months.

The Royal Bank of Scotland's PMI report for May saw new orders fall, with cost pressures leading companies to raise selling prices at a quicker pace.

This means the modest pick-up in activity in April has been reversed.

And confidence within the business community remains subdued amid Brexit concerns and forecasts of weaker growth of Scotland's economy.

Operating expenses were driven higher by labour costs as firms continued to expand their workforces.

The Scotland Business Activity Index - a measure of combined manufacturing and service sector output - fell to 48.9 in May, from 51.0 in April, signalling a reduction in private sector activity.

Increased employment

Relative to other areas of the UK, only Northern Ireland observed a quicker fall in output than Scotland.

Although the fall in demand was only marginal, it was a stark contrast to the robust growth rates seen throughout 2018.

The lower demand enabled firms to work through outstanding business in May, reducing backlogs for the eighth month in succession.

Employment increased for a 15th straight month. However, the rate of job creation was modest.

Business confidence is subdued, in part due to Brexit worries

Scottish businesses anticipate output to rise over the coming year, but the degree of confidence remained subdued.

Malcolm Buchanan from Royal Bank of Scotland said: "Private sector business activity was dragged back into contraction by a weaker service sector in May, reversing the rebound seen in this part of the economy which helped reinstate overall growth in Scotland in April.

"For the fifth time in six months, new orders fell. Panellists attributed order book contraction to weak overseas demand and reduced confidence within the local economy.

"Brexit-related concerns and fears of slowing economic growth north of the border remained prominent, ultimately keeping business confidence subdued and below the UK average."

Back in the black

Meanwhile, small businesses appear to be more positive.

New figures from the Federation of Small Businesses (FSB) suggested that business confidence had bounced back into the black for the first time in a year.

In the second quarter of 2019, FSB's Scottish Small Business Index (SBI) increased by a record 37.5 points to +3.3.

It is only the second time since 2015 that business optimism in Scotland has been in positive territory.

It comes after two quarters of record-breaking lows.

A mini heatwave at Easter gave small businesses a boost

In contrast, the UK Index has fallen further into negative territory, down to -8.8 points from -5 last quarter. This is the fourth straight quarter in which the UK index has been below zero, a first in its near 10-year history.

Andrew McRae from FSB Scotland said: "After five years lagging behind the UK average - and some record low readings over the last six months - it's a refreshing change to see Scotland bucking the trend in a positive way.

"It's hard to point to a single factor behind this. The mini heatwave around Easter has reportedly given some important sectors a bit of a bounce.

"Equally, the Brexit extension in April let businesses breathe a sigh of relief that the threat of crashing out of the EU without a deal had receded for the immediate future."