Order books increased for a second month running, however growth here was driven entirely by demand for services as manufacturing sales dropped sharply. Challenging conditions were also highlighted by employment declining for the first time since May 2017, while business confidence dipped to a 35-month low.
The seasonally adjusted headline Royal Bank of Scotland Business Activity Index - a measure of combined manufacturing and service sector output - posted 50.2 in July, down from 51.3 in June, signalling a fractional rate of growth in private sector output in Scotland at the start of the third quarter.
While a mild and slower expansion in business activity was registered at service providers, manufacturers reported a solid and quicker fall in production.
Latest survey data signalled back-to-back gains in new business at Scottish private sector firms in July. The pick-up in sales was driven by services, as manufacturing order books contracted sharply and at a quicker rate. New client wins reportedly lifted sales at service providers, but manufacturers mentioned uncertainty and softer underlying demand conditions as factors restricting new work inflows. Overall, aggregate order book volumes increased modestly, but at a slower rate than seen on average.
Relatively subdued demand conditions filtered through to hiring in July, with employment levels falling for the first time in over two years. The trend in Scotland diverged from the UK overall, where job creation was sustained. The drop in staffing levels was driven by goods producers, as workforce numbers were held broadly stable in the service sector. Meanwhile, a tenth successive monthly reduction in backlogs of work was recorded in Scotland, indicating spare capacity.
A broad-based softening of inflationary pressures was signalled by the survey data in July, with manufacturers and service providers both reporting slower rises to input costs and prices charged. According to anecdotal evidence, competitive pressures had reduced businesses' flexibility to pass on higher cost burdens to their clients.
Looking ahead, private sector companies in Scotland expect output volumes to be higher than present levels in 12 months' time. That said, the degree of confidence was the lowest in nearly three years. Brexit uncertainty, slower global growth and concerns regarding the UK economy reportedly weighed on sentiment in July.
Malcolm Buchanan, Chair, Scotland Board, Royal Bank of Scotland, commented: “Having been one of the top-performing areas of the UK in June, Scotland’s private sector approached stagnation at the start of the third quarter, growing only fractionally. The main source of weakness remained manufacturing, where production was cut back at a sharper rate amid a deeper downturn in demand. Slowing global growth remained a key factor that panellists attributed challenging manufacturing conditions to.
“That said, the recent bout of sterling depreciation may act as a temporary boost to sales for Scottish manufacturers, although this will come at a price of greater imported costs.
“Scotland’s private sector remains dependent on services and sustained appetite from the domestic market. Whether services growth can continue to offset the manufacturing sector’s plight remains key, although the drop in business confidence to a 35-month low in July was underpinned by concerns towards the UK economy, raising question marks as to whether the positive growth trend in services can continue.”