Muted outlook for companies as they work through backlogs, according to bellwether economic surveys from RBS and Bank of Scotland

Two new major economic surveys from Scottish banking giants paint a mixed picture for the private sector.

Firms have been working through their backlogs amid declining demand, according to high-profile economic analyses from two Scottish banking giants.

Royal Bank of Scotland (RBS) has revealed its latest purchasing managers' index, which it says signals a solid reduction in Scottish private sector activity in November. Its Scotland business activity index came in 47.1 last month, up from 46.5 in October, but still below the crucial 50 mark, and therefore in contraction mode, for the third month running.

What’s more, the NatWest-owned lender said the decline reflected a “sharp and accelerated” fall in manufacturing output and a weaker reduction in services activity, with the downturn propelled by a stronger reduction in new orders, as underlying demand conditions worsened. Inflows of new business fell solidly across Scotland in November, thereby extending the current run of decrease to five months, and showing the fastest rate of contraction in the sequence.

RBS has uncovered a 'solid' reduction in Scottish private sector activity, which it says reflects a 'sharp and accelerated' fall in manufacturing output. Picture: Getty Images/iStockphoto.

Scottish private sector firms generally anticipated growth in business activity over the coming 12 months in November, with sentiment improving to a five-month high. This index came in at 59.5, and companies cited increased marketing plans and hopes of stronger demand, as well as stable interest rates and lower inflation. Additionally, businesses remained keen to raise their workforce numbers in November – with the employment index 52.5 – despite shortfalls in demand.

RBS also said the sustained decline in new orders led to a further fall in backlogs last month. The rate of depletion remained strong, despite easing since October, and this index settled at 46.6. Firms cited improved availability of raw materials and the intake of additional staff as driving factors, and work-in-hand has now fallen in 17 of the past 18 survey periods.

Judith Cruickshank, chair of the Scotland board at RBS, said: "Businesses across Scotland struggled to raise their activity as waning demand and growing market uncertainty hampered sales in November. Moreover, with expectations remaining historically muted, the downturn could continue into the new year. However, despite the setbacks private sector companies are facing, the labour market remains resilient.”

Also flagging resilience was a separate, UK-wide survey from Bank of Scotland showing “bright spots”. The Lloyds-owned lender’s latest UK sector tracker said the number of sectors reporting output growth rose to a five-month high in November, at seven out of 14 – three more than in October, and the highest number since June. However, for the first time since June 2020, every UK sector reported running down backlogs of work to support output amid widespread falls in new orders.

Last month, 11 of the 14 reported declining demand as measured by new orders, the same number as the previous month. The sectors that saw demand rise were food and drink manufacturers – albeit at a marginally slower rate (59.4) than the month before (59.6)

Nikesh Sawjani, senior UK economist at Bank of Scotland commercial banking, said November’s data pointed to “bright spots”, but added: “Businesses can’t run on outstanding work alone, and if they’re relying on backlogs to maintain activity now, we could eventually see their output fall when these jobs are exhausted.”