RBS: Scottish business activity rising fast - inflation follows

Scottish private sector output rose at an accelerated pace in February, according to the latest Royal Bank of Scotland PMI.

RBS: Scottish business activity rising fast - inflation follows

Malcolm Buchanan

The seasonally adjusted headline Royal Bank of Scotland Business Activity Index - a measure of combined manufacturing and service sector output - rose to 55.5 in February, from 53.7 in January, to signal the fastest rate of expansion for three months and one that was sharp overall.

At the sector level, manufacturing output returned to growth, while services activity rose at a quicker pace. Meanwhile, the rate of increase in new business accelerated to a three-month high and was sharp overall. According to panellists, the easing of restrictions had led to stronger client demand.

Less positive news came from the survey’s price indicators in February. The rate of cost inflation was the steepest on record, with respondents citing greater fuel, material, energy and staff costs. As a result, firms raised their average charged at the quickest rate in the series history.

An eleventh straight monthly increase in new business to Scottish private sector companies was recorded in February, amid reports that demand had improved due to the easing of pandemic restrictions. The latest uplift in new work was the strongest for three months and solid overall. At the sector level, manufacturing order book volumes rebounded, while services firms recorded a quicker uplift in new work.

The rate of expansion in Scotland continued to lag the UK-wide trend, however. Across the 12 monitored UK areas, only the North East saw a slower upturn in new business than Scotland during February.

Business confidence at Scottish companies improved further in February. The level of sentiment was the strongest since last July and the ninth highest on record. Optimism was driven by hopes of a strong rebound following the easing of COVID-19 restrictions, according to anecdotal evidence.

Scottish private sector firms recorded a further increase in staffing levels during February, stretching the current sequence of hiring to nearly a year. According to panellists, firms were taking on additional staff due to strong sales and amid efforts to raise capacity back to pre-pandemic levels. The rate of job creation was the sharpest for three months and amongst the quickest on record.

Scotland recorded a much slower increase in workforce numbers than the UK-wide average in February, however.

An eleventh successive monthly increase in the level of outstanding business at Scottish companies was recorded in February. Anecdotal evidence attributed the latest uplift to strong sales. The rate of backlog accumulation was the fastest since last October and solid overall.

At the sector level, stronger capacity pressures at services firms contrasted with a further fall in manufacturing backlogs during February.

February data highlighted a further surge in costs faced by Scottish firms. Greater fuel, energy, material and wage costs were the primary drivers of inflation, according to survey respondents. Notably, the latest rise in input prices was the strongest on record.

That said, Scotland recorded the slowest rate of cost inflation across the 12 motioned UK areas in February.

As has been the case in each month since November 2020, prices charged by Scottish private sector firms rose during February. Panellists linked the latest increase to the pass-through of greater costs to clients. Moreover, the rate of charge inflation was the steepest on record.

Both manufacturers and service providers registered steeper increases in charges levied during February, with the rates of inflation in both cases the strongest in the respective series histories.

Malcolm Buchanan, chair, Scotland Board, Royal Bank of Scotland, commented: “Business activity across Scotland’s private sector rose at the strongest pace for three months during February, as demand strengthened solidly amid the scaling back of COVID-19 restrictions. Manufacturing production rebounded, while Scottish service providers registered a faster upturn in activity.

“That said, the stronger performance was dampened slightly by unprecedented inflationary pressures in February. Firms continued to face surging energy, fuel, material and staff costs, which pushed the rate of cost inflation to a survey peak, and subsequently raised their own charges at a record pace.”

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