RBS Growth Tracker: Scottish firms cut jobs for third month as labour costs mount

Royal Bank of Scotland’s latest Growth Tracker also points to a modest increase in overall private sector activity during August, while a downturn in new business showed signs of easing. The monthly study provides a comprehensive insight into Scotland’s service and manufacturing sectors and is based on purchasing managers’ index (PMI) data, which is closely watched by central banks, financial markets and business decision makers.

RBS said that following a modest fall in July, August’s data revealed a renewed rise in private sector output across Scotland. However, the uptick in activity was described as “marginal”.

Growth has now been observed in three of the last four months. At the same time, the downturn in new business showed signs of easing, with the rate of contraction among the weakest seen over the current 11-month sequence of decline and, again, only marginal.

Crucially, the headline Royal Bank of Scotland tracker - a seasonally adjusted index that measures the month-on-month change in the combined output of the country’s manufacturing and service sectors - surpassed the neutral mark of 50 in August, climbing from 48.7 in July to 50.3.

According to the latest findings, the increase in output was driven by the dominant service sector, which reported a rise in enquiries, new contract wins, and successful marketing campaigns.

Meanwhile, output continued to contract across the Scottish manufacturing sector. However, the rate of decline was the weakest in nearly a year, suggesting that production levels moved closer to stabilising, RBS noted.

Business sentiment improved in August as more firms on balance anticipated output growth in the coming 12 months. However, companies were cautious with regards to payrolls, as job shedding persisted, with many attributing this to rising labour costs.

Judith Cruickshank, chair, Scotland board at Royal Bank of Scotland, said: “Businesses across Scotland experienced a fresh rise in activity in August, which helped to offset a modest reduction in the previous month.

“Forward-looking indicators suggested a relative improvement in conditions facing firms, with the downturn in new business easing notably, and companies expressing a more optimistic outlook for future activity.

“However, despite these improvements, companies remained cautious about expanding their workforce numbers. Employment declined for the third consecutive month, with firms partly linking this to rising labour costs.

“Although cost pressures remained sharp, they showed signs of easing compared to July. At the same time, greater confidence around the outlook and demand led firms to raise their charges at a stronger pace.”

The August data signalled a decline in new business across Scotland for the 11th straight month. However, the pace of decrease was the joint-weakest in the aforementioned sequence and only slight, RBS stressed.

The drop was centred on manufacturers, with many firms citing uncertainty and weak underlying demand conditions as contributing factors. In contrast, service providers reported a modest increase in sales.

Scotland diverged from the trend observed at the UK level, which indicated a “solid” increase in overall new business.

Firms north of the Border were more optimistic about activity growth in the year ahead during August. Businesses were hopeful that a stronger demand environment and new product releases will boost activity. However, the overall degree of positive sentiment remained historically subdued and was weaker than the UK-wide average.

A modest fall in employment was recorded across Scotland’s private sector in August, stretching the current sequence of job losses to three months. The pace of decrease was the strongest since February, though less severe than that seen across the UK as a whole.

RBS said anecdotal evidence often attributed job losses to redundancies and decisions not to replace voluntary leavers, largely due to increased labour costs. Companies have to juggle with increases in the minimum wage and higher national insurance contributions.

Private sector firms based in Scotland recorded a further marked increase in their input costs last month. While the pace of inflation moderated to a three-month low, it remained sharper than the long-run survey average. Material shortages, supplier price hikes and higher labour costs were cited as having pushed up expenses.

Scotland, together with the West Midlands, reported the weakest rate of cost inflation among the 12 monitored UK regions and nations.

Though output charges were raised at a softer pace than that seen for costs, the rate of inflation quickened on the month and was historically strong. Businesses often mentioned passing on higher expenses to their clients where possible.

Small businesses

A separate study last week warned that rising costs were threatening the growth ambitions of thousands of small businesses in Scotland, despite a desire to invest and expand.

More than half of smaller firms north of the Border have plans in place to expand over the next two years, according to the latest research by the Federation of Small Businesses (FSB) Scotland.

However, the report also revealed that staff shortages have forced one in five small businesses to cut the services they offer their customers over the past year. Meanwhile, a lack of access to finance and the growing regulatory burden were highlighted as significant issues for smaller businesses, which collectively turn over some £93 billion annually and employ in the region of 900,000 people.

Guy Hinks, FSB Scotland’s chairman, said: “Scotland’s small businesses are resilient and resourceful with the undoubted potential to drive the economic growth everyone recognises the country needs. However, the ever-rising costs of operating a business risk having a deadening effect on those growth ambitions.”

Scotland’s private sector throws up mixed messages at start of second half