Scottish private sector continues expansion

May 14, 2012 12:00 AM

With a headline index reading of 53.5, the second-highest in nine months, the PMI suggests the private sector remained firmly in expansion mode despite facing headwinds at home and overseas. A reading of 50 separates expansion from contraction.
Completed by Markit, the latest PMI points to a notable improvement in the services sector, which was hit hard by the fall-out from the financial crisis of 2008.

Services activity rose at the sharpest rate for 12 months in April, when firms in the travel, tourism and leisure businesses led the way. The services activity index reading increased to 55.2 in April from 55 in March.
With Bank of Scotland highlighting "a marked and accelerated rise in headcounts in the service sector" the results will boost hopes that the private sector will be able to make up the slack that will be created by cuts in public spending under the Government's deficit reduction plans.

Ministers will have to wait until the release of Scotland's gross domestic product figures for the first quarter, in July, before they will know if Scotland managed to avoid joining the UK in recession in the six months to March. Scottish GDP fell by 0.1 % in the last quarter of 2011.
However, the PMI will boost hopes that the effects of any damage that the economy suffered at the height of the crisis in the Eurozone late last year will be short-lived.

Professor Donald MacRae, chief economist at Bank of Scotland, said: "This result indicates the Scottish economy has negotiated the downturn at the end of last year with a minimum fall in output and encourages hopes for a return to growth in 2012."
The results suggest the private sector may now be in better shape in Scotland than in other parts of the UK. The headline index reading for the UK fell from 55.1 in March to 53 in April, 0.5 points lower than the Scottish reading.

The employment index reading was higher in Scotland than in the UK (52.5 compared with 51.9) for the third month running. However, aspects of the PMI will provide cause for concern.
The headline reading in Scotland in April was 0.6 points lower than the reading for March, 54.1. The slowdown reflects the challenges faced by manufacturers, which experts hope will help Scotland reduce its reliance on financial services. These recorded their first fall in output for three months as the output index reading fell to 48.5, from 51.5 in March. Orders fell for the first time since last December.

The bank said firms noted a fall in demand from the construction sector. While export orders increased slightly, despite problems in the Eurozone, the growth was not strong enough to compensate for weaker demand in the UK.
Input price inflation in Scotland subsided "slightly" during April, but Bank of Scotland said "average purchasing costs still increased at a marked rate overall, and more quickly than at the UK level".

Separately, the results of research by BDO suggested the downward trend in inflationary expectations seen in the past nine months is coming to an end, amid high fuel and energy costs. The accountancy firm said inflationary pressures, compounded by low growth in annual earnings, were critically undermining consumer spending power.
"While there is a more positive view of the economy than six months ago, findings show that business people across the UK predict protracted slow growth for the UK economy for the remainder of 2012," said BDO.

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