Scottish economy grows but bank warns of rising inflation

Scotland’s economy grew last month for the first time since September although economic activity lags behind most parts of the United Kingdom, new figures suggest.

After six months of declining, the Scottish economy registered a significant increase in its combined manufacturing and service sector output in March, the Royal Bank of Scotland said.

But the bank warned there are signs of inflation, with companies charging more because of increased costs caused by supply shortages, Brexit and coronavirus.

The Royal Bank of Scotland Business Activity Index measure of manufacturing and service sector output rose from 44.1 in February to 54.3 in March.

According to the regional Purchasing Managers’ Index (PMI) measure, Scotland’s business activity growth was ninth out of the 12 English regions and countries in the UK, exceeding the East Midlands, the South West and Northern Ireland but below the UK-wide average.

Highlighting signs of inflationary pressures, the report found Scottish companies increased prices at the quickest pace for almost two years – since May 2019.

This follows 10 consecutive monthly increases in average business costs, with company bosses reporting higher prices at suppliers and for raw material, with Brexit and Covid-19 cited as the main drivers of inflation.

The latest increase in “input prices” was the steepest since August 2018, according to the bank, with goods producers recording a much quicker upturn in costs than services firms.

Cost burdens also rose across the UK as a whole in March, with the rate of inflation lower in Scotland than the UK average.

Further job losses were also recorded in March as staffing levels at Scottish firms dropped, according to the report.

It suggests the latest fall has been due to staff who have left because of the pandemic not being replaced, alongside additional lay-offs and redundancies, although the “rate of job shedding” was the slowest since February last year.

Malcolm Buchanan, the Scotland board chairman at the Royal Bank of Scotland, said: “The end of the first quarter saw a return to growth for the Scottish private sector economy.

“Output rose for the first time in six months, and solidly, while inflows of new work neared stability as looser lockdown measures provided a boost to many firms.

“Supply chain issues, shortages, Brexit and the pandemic were all attributed to greater inflationary pressures, however, highlighting that the recovery may well bring with it higher prices due to ongoing logistical constraints.

“Nonetheless, business confidence hit a fresh record high in March, with companies confident of a robust economic recovery as measures ease.”

The report found business confidence grew for the fifth consecutive month – the highest since 2012 – with anecdotal evidence linking the optimism to the planned easing of restrictions amid the ongoing vaccine rollout, hopes of improved client demand and a solid economic recovery.