Growth returns but inflation risks clear
Costs surge at fastest pace in 67 months as weak sterling hits Scots firms
SCOTTISH companies’ costs surged in December at the fastest pace in 67 months, as they continued to endure the consequences of sterling weakness following the Brexit vote, but the private sector nevertheless returned to growth, a survey shows.
Both the manufacturing and services sectors experienced rising costs, according to the Bank of Scotland’s latest PMI (Purchasing Managers’ Index) report.
Many Scottish manufacturers cited the depreciation of the pound as the main factor driving the increase in input costs last month, which was the sharpest since early 2011 and “substantially stronger” than the historical average.
The rate of increase of factory gate prices meanwhile matched the 63-month high recorded in November, with the bank citing “anecdotal evidence” manufacturers were passing on higher costs to customers.
The findings of the survey, compiled by financial information company Markit, chime with expectations of a further surge in annual UK consumer prices index inflation this year. This projected jump in annual CPI inflation is expected by economists to be among the factors causing a sharp slowing of UK growth this year from already belowtrend levels.
Scottish services companies experienced the sharpest monthly rise in their costs since December 2011, amid higher prices for fuel, timber and food. And services companies last month increased their prices at the fastest pace for nearly three years.
The overall input prices index for the Scottish private sector, which measures companies’ costs, jumped from 64.5 in November to 66.4 in December, moving even further above the no-change mark of 50.
Bank of Scotland highlighted the impact on companies’ profit margins.
In spite of the surge in costs, the Scottish private sector economy returned to albeit slight expansion during December, having contracted in November.
The output index for Scotland rose from 49.4 in November to 50.7 last month on a seasonally adjusted basis, edging back above the level of 50 deemed to separate expansion from contraction.
However, the rate of expansion signalled by the December reading was well adrift of that in the UK as a whole, for which the output index rose from 55.3 in November to 56.7 last month.
The employment index meanwhile signalled a return to growth of the private sector workforce in Scotland, rising from 49.5 in November to 51.6 in December.
And Scottish firms also, overall, achieved a return to growth in new business. The new business index increased from 49.8 to 50.4.
Nick Laird, managing director for commercial banking for Bank of Scotland north of the Border, welcomed the Scottish economy’s return to growth last month.
He said: “With output, new orders and employment all returning to growth… Scotland’s economy bounced back at the end of 2016.
“The improvement in business conditions across both the manufacturing and service sectors puts Scotland on a firmer footing as we start the new year.”
He added: “Headwinds remain, however, principally through the continued increase in input costs, which rose at their sharpest pace for 67 months. Given the strain this will place on operating margins, firms throughout Scotland will undoubtedly be looking for this to ease during the year ahead.”
The Scottish services sector returned to growth in December, with its output index rising to 50.5 from 48.5 in November.
Meanwhile, the pace of growth of the Scottish manufacturing sector eased slightly, with its output index dipping from 52.8 in November to 51.6 last month.
However, while growth of new business in this sector remained modest, the pace of increase of Scottish manufacturers’ incoming export orders accelerated to its fastest pace in three months in December. Some firms associated the rise in export orders with the introduction of new products in the US.
The Scottish manufacturing and services sectors both raised employment last month, the survey shows. Both had recorded a slight fall in employment in November.