Bank of Scotland

Growth rebounds, led by service sector

10 November 2014

Growth of Scottish private sector business activity picked up at the start of the final quarter, October’s Bank of Scotland PMI showed, reversing the slowdown seen in September when output rose only modestly. The level of new orders received by businesses north of the border also increased at a faster rate, although the pace of job creation eased further. Meanwhile, data on the price front showed historically weak input price inflation and only a marginal rise in output charges.

The seasonally adjusted headline Bank of Scotland PMI – a single-figure measure of the month-on-month change in combined manufacturing and services output – rebounded to 54.2 in October, from an 18-month low of 51.5 in September. Behind the acceleration was a faster rate of expansion in service sector business activity – the sharpest for three months – as well as a return to growth in goods production. That said, the degree to which factory output rose was only marginal.

One factor boosting output growth was a faster increase in the level of incoming new work at businesses. The rate of expansion in new work was at a three-month high, bolstered by strong inflows at services firms. New orders in the manufacturing sector continued to fall, however, and at a faster rate than in September due in part to increasing weakness in export sales

Reflective of output growth outstripping that of new business, October’s survey showed a further decrease in the level of outstanding work at businesses. That extended the current sequence of depletion to six months. The rate at which backlogs were reduced was only modest, but nevertheless the fastest since March 2013.

With firms generally able to keep atop of workloads, October saw a further easing in the rate of job creation to a ten-month low. A weaker increase in service sector employment underpinned the overall slowdown.

Output prices rose only fractionally on average at the start of the final quarter, with the rate of inflation slower than in September. Factors weighing on inflationary forces included pricing competition and attempts to boost demand amid relatively weak cost pressures.

Average input prices rose at the slowest rate for more than five years in October. Where an increase in costs burdens was recorded, this was mainly linked to higher salary payments.

Donald MacRae, Chief Economist at Bank of Scotland, said:  “October’s PMI bounced back from September’s referendum induced low to reach 54.2.  Both services and manufacturing sectors recorded growth with a welcome increase in the level of new business particularly in financial services.  But the level of new export orders at manufacturers fell for the fourth month in succession illustrating the effect of the slowdown in the Eurozone.  The Scottish economic recovery continues but at a reduced rate compared to the first half of the year.”

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