Private sector activity declined substantially in May

Business activity in Scotland’s private sector continued to decline substantially in May as conditions remained “extremely challenging” in lockdown, according to a new report.

The volume of new work received by private sector firms in Scotland continued to plummet in May.

Anecdotal evidence linked the fall to temporary business closures and weak client demand amid continued lockdown restrictions as a result of the Covid-19 pandemic.

The pace of contraction was slower than in April, but still the second-fastest since data collection began in January 1998, according to the Royal Bank of Scotland Purchasing Managers’ Index (PMI) report.

However, private sector firms in Scotland signalled renewed optimism regarding activity over the year ahead in May.

The Future Output Index posted above the 50.0 no-change mark for the first time since February, with respondents linking optimism to looser lockdown restrictions and hopes of an economic recovery.

Malcolm Buchanan, chairman of the Scotland board at Royal Bank of Scotland, said: “The Scottish private sector continued to be affected by the Covid-19 pandemic in May, with latest data highlighting further rapid declines in both activity and new business.

“The rates of contraction softened from April’s records, but were still the second-quickest in over 22 years of data collection. With demand essentially frozen, companies continued to make substantial reductions to workforce numbers.

“With restrictions easing, sentiment regarding activity over the year ahead returned to a positive footing as businesses look set to reopen and amid hopes of improved demand and an economic recovery.

“Overall, conditions in the Scottish economy remain extremely challenging, with reductions in activity, new business and backlogs all outpacing those seen at the UK level.

“Although data indicates that the downturn has bottomed out, the pandemic has dealt an unprecedented blow to the economy.”

The seasonally adjusted headline Royal Bank of Scotland Business Activity Index – a measure of combined manufacturing and service sector output – posted 21.1 in May, rising from 10.7 in April, with a reading below 50 signalling contraction.

Private sector firms in Scotland reduced workforce numbers again in May, extending the current sequence of job cuts to four months.

Respondents reported that weak client demand had led them to reduce staffing levels, although some mentioned the use of government furlough schemes.

Meanwhile, a lack of new business meant Scottish private sector firms continued to focus more resources on completing outstanding work in May.

The Royal Bank of Scotland PMI is compiled from responses to questionnaires sent to a panel of around 500 companies.