Poor December survey data rounded off what had already promised to be a weak final quarter for Scotland’s private sector, according to the latest Bank of Scotland PMI report.

New orders and output both contracted as adverse weather dampened domestic demand. Services performance was hit particularly hard, however further export growth cushioned the blow for manufacturers.

The headline Bank of Scotland PMI – a seasonally adjusted index monitoring activity across Scotland’s manufacturing and service industries – signalled a contraction of Scotland’s private sector economy in the final month of 2010, falling almost ten points to 39.6 from 49.5 in November. Quarterly averaged PMI data showed that output performance in Q4 was the weakest since Q1 2009.

December’s low headline index reading reflected contractions in both manufacturing and services activity, with the latter’s decline owing much to its dependence on domestic demand, which was depressed further by severe weather conditions.

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Foreign demand, in comparison, remained solid as manufacturers reported continued growth of new export orders. Consequently, manufacturers registered only a moderate dip in new work, while service firms reported a decline. Overall, new business receipts in the Scottish private sector fell.

As workloads fell in December, backlog clearance gained pace and staffing continued to be reduced. However, these declines were centred on services as firms in that sector attempted to manage costs. In manufacturing, outstanding business rose at a series record rate as finished goods shipments were delayed by poor weather. Manufacturers also continued adding to payrolls to help reduce backlogs and in anticipation of improved demand.

Overall price pressures in the Scottish private sector were largely unchanged in December. Input prices continued to rise, driven by higher fuel, raw material and transport costs, while charge inflation remained marginal. With regard to output prices, marked inflation in manufacturing continued to be partly offset by a slight decrease in services.

Donald MacRae, Chief Economist at Bank of Scotland, said: “December was a difficult month signalling a weak last quarter of 2010 for the Scottish economy. However, there were encouraging signs of continuing robust export demand.

"Harsh weather hit the Scottish economy in December, resulting in a twenty-two month low for the PMI output index. Services performance was hit particularly hard leading to a trimming of the workforce. The latest decline in services activity was broad-based with travel, tourism and leisure showing a record decrease in output while both financial and business services showed sharp falls.

"On a more positive note, manufacturers reported growth of export business and continued to hire in December. Employment growth in the manufacturing sector picked up to a four-month high as extra staff were required to help reduce backlogs and in anticipation of improved demand in 2011. ”

(GK)