finance

Private sector growth moderates further as Omicron concerns strike



The Scottish private sector recorded a further upturn in activity at the end of 2021, according to the latest Royal Bank of Scotland PMIs.

The seasonally-adjusted Business Activity Index – a measure of combined manufacturing and service sector output – posted 52.7 in December, down sharply from 55.9 in November.

The index is the sum of the percentage of ‘higher’ responses and half the percentage of ‘unchanged’ responses – varying between 0 and 100 – with a reading above 50 indicating an overall increase compared to the previous month, and below 50 an overall decrease.

The results signalled a further uplift in activity, but one that was the weakest in the current 10-month sequence of growth.

At the sector level, services saw a slower rate of expansion, while factory production declined for the first time since last September.

At the same time, growth of new work eased noticeably, with inflows of new business rising only mildly overall in December, as some survey respondents noted that Covid-19 concerns had weighed on client demand.

Elsewhere, inflationary pressures remained elevated, although the rates of both cost and charge inflation slowed from November’s recent peaks.

Inflows of new work to Scottish firms rose for the ninth month running in December, amid reports of improved client demand. The rate of growth eased noticeably to the weakest in the current sequence however and was only mild overall.

A further uplift in new business at service providers was weighed on by a marginal decline in manufacturers order book volumes.

December data pointed to sustained confidence at Scottish companies with regards to activity over the coming 12 months.

Optimism was attributed through anecdotal evidence to hopes that Brexit and coronavirus-related issues would diminish, and demand conditions would improve. The level of sentiment moderated slightly since November, but remained historically strong.

For the ninth time in as many months, Scottish private sector companies recorded an increase in employment during December. Anecdotal evidence attributed the latest rise to efforts to alleviate capacity pressures and scale up operations in expectations of stronger sales in the coming months. The rate of job creation was strong, but nonetheless the slowest since last April.

Notably, Scotland recorded a much slower upturn in employment than the UK-wide average.

As has been the case in each month since last April, the level of outstanding business at Scottish firms rose during December.

Strong sales in prior months, as well as supply issues, were the main causes of capacity pressures according to survey respondents. That said, the rate of backlog accumulation was the slowest since September and only fractional.

At the sector level, a fresh decline in backlogs of work at manufacturers contrasted with a slight upturn at services firms.

Input prices faced by Scottish private sector firms continued to rise in December.

Greater fuel, transport, staff and material costs, as well as shortages, Brexit and Covid were all cited by panellists as drivers of inflation. Notably, the rate of increase in cost burdens eased only slightly from November’s peak and was rapid overall.

That said, across the 12 monitored UK areas, only London recorded a slower rate of cost inflation than Scotland in December.

In response to greater costs, Scottish firms again increased their charges in December, stretching the current sequence of rising output prices to 14 months. The rate of inflation slowed noticeably from November’s peak to a four-month low, but was still amongst the fastest on record.

As was the case for input prices, manufacturers recorded a far quicker rate of charge inflation than their service sector counterparts.

Malcolm Buchanan, chair of the Scotland board at RBS, said that Omicron concerns weighed on client demand and supply issues continued to hinder companies, particularly in the manufacturing sector.

“Inflationary pressures also remained severe in December, although the latest data pointed to a slight easing of pressure as both cost burdens and average charges increased at slightly reduced rates.

“Nonetheless, firms remained upbeat towards activity over the next 12 months, with Scottish companies expecting Covid-19 related issues to subside and demand to improve as we enter 2022.”

RBS chief economist Sebastian Burnside added that despite the similarities to previous waves of the virus, business activity levels seem to have been more resilient this time, due in part to comparatively lighter restrictions.

“The labour market was a bright spot for all regions in December, as was the case throughout most of last year – although in many instances the pace of job creation slowed, rates of employment growth generally remained solid by historical standards, supported by continued optimism towards growth prospects in 2022.

“Rates of input price inflation eased universally in December, though this won’t have provided much respite to businesses as cost pressures continued to run hot by historical standards,” he concluded. “Businesses managed to pass on higher costs to customer during 2021 as demand strengthened, and December was no exception albeit with rates of output price inflation ticking down from record highs in November in some cases.”

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