PMI Dips in April, but Still Points to Solid Private Sector Growth

13th May 2014

* Output levels rise solidly in April, albeit at slowest pace in four months
* Faster increases in new business and backlogs of work
* Inflationary pressures strengthen slightly.

Scotland's private sector economy continued to grow in April, the latest Bank of Scotland PMIreport showed, with output and employment both rising on the month. The pace of expansion in output was the slowest in 2014 so far, but faster increases in new business and backlogs of work nevertheless pointed to the upturn being sustained. April's survey meanwhile showed slightly faster rises in both input costs and average output prices.

April saw the seasonally adjusted headline Bank of Scotland PMI – a single-figure measure of the month-on-month change in combined manufacturing and services business activity – fall from March's 56.4 to 54.8, its lowest reading in the year-to-date. That said, having trended at a relatively high level by the historical standards of the survey throughout the opening quarter, the latest reading was still consistent with a solid rate of expansion overall. Both manufacturers and services firms recorded notable rises in output, though in each case growth was slower than during March.

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Output / Business Activity
April saw a further solid increase in the level of business activity at services firms, stretching the current
sequence of growth to 40 months. Despite being the slowest in 2014 so far, the rate of expansion in
business activity remained in excess of the long-run series average. April data meanwhile showed an
easing in the rate of growth of manufacturing output. Anecdotal evidence suggested that a slowdown in
new order growth at the end of the opening quarter was partly to blame for the weaker increase in output
compared to March.

New Business
New business growth at services firms reaccelerated to a sharp rate in April. Survey participants cited
improved market conditions, a strengthening housing market and better marketing strategies as factors
leading to growth in new business. April’s increase in new work intakes was the twentieth in successive
months. New order intakes at manufacturers increased at a faster pace in April. In fact, growth was
strong and the sharpest in three months having improved markedly from the modest pace recorded
during the preceding survey period. Panel member reports pointed to strengthening of demand from
manufacturers’ clients, particularly from those operating in the domestic market.

Backlogs
April’s surge in new business at services firms resulted in a further accumulation of outstanding work in
the sector during the month. Furthermore, the rate at which backlogs of work increased was solid and the
most marked since last December. Backlogs of work at manufacturers decreased only marginally in
April, and at the slowest rate in the current nine-month sequence of decline. While a number of
businesses commented that increased order intakes had placed greater pressure on resources, others
mentioned having adequate capacity to handle increased production requirements.
Input prices
The rate of input price inflation faced by services firms in Scotland ticked up in April, after having eased
to a 53-month low during the preceding survey period. Where an increase in input prices was recorded
this was sometimes linked by respondents to higher staff pay and increased food and drink costs. The
rate of input price inflation in the manufacturing sector remained subdued in the context of the historical
survey data in April. Although faster than March’s 20-month low, the pace of cost inflation remained well
below the survey’s long-run series average. Where a rise in purchasing costs was recorded, this was
sometimes linked by panellists to suppliers having exercised their pricing power and raised charges.

Output prices
A combination of demand-pull factors and higher average costs led service providers to raise average
charges in April. The rate of inflation in prices charged was solid and faster than in the previous month.
April marked the thirteenth straight month during which average output prices have increased, which is
the longest sequence of continuous inflation for five-and-a-half years. Facing higher input costs,
manufacturers sought to protect their margins and raised factory gate prices for the tenth successive
month in April. The degree to which output prices increased was solid, and only slightly less marked than
that observed in the previous month.

Employment
The rate of job creation among Scottish service providers eased for the second month in a row in April,
to only a moderate pace that was the slowest since January. Nevertheless, employment in the sector has
now risen in 29 of the past 30 months. The rate of staff hiring at manufacturers continued to gather pace
in April, hitting a fresh survey record. A number businesses reported adding to their payroll numbers in
order to meet increased output requirements. Net job creation has now been recorded in the sector for 15
months in a row.

In contrast to a slight slowdown in output growth, the level of new business placed with private sector firms operating in Scotland rose at a faster rate in April – the most marked since January. Data showed that the domestic market was the key driver of the upturn, with new export ordersat manufacturers having fallen marginally for the third consecutive month.

Labour market conditions also improved during April, with private sector companies adding to their payroll numbers for the seventeenth straight month. The rate of staff hiring was slowest since January, but solid nonetheless.

The surge in new business in April, coupled with slower employment growth, contributed a further accumulation of outstanding work. Moreover, the degree to which backlogs of work increased was the most marked in seven months.

On the costs front, April data showed an uptick in input price inflation faced by businesses operating in Scotland from March's 54-month low. Service providers noted the sharper acceleration in costs, citing higher average outlays for staff and foodstuffs. That said, the overall rate of input price inflation remained below the long-run series average.

Average output prices in the Scottish private sector economy also increased at a faster rate in April, and more markedly than across the UK as a whole.

Donald MacRae, Chief Economist at Bank of Scotland, said: “April's PMI was a solid 54.8 indicating continuing growth in the Scottish economy in the month. The recovery is broad based with output growing in both services and manufacturing sectors, accompanied by rising employment and a growing level of new business. A strong pound may be contributing to new export orders falling marginally for the third consecutive month."

The Bank of Scotland PMI is compiled by Markit for Bank of Scotland and is based on data compiled from
monthly replies to questionnaires sent to purchasing executives in around 600 private manufacturing and
service sector companies. The panel has been carefully selected to accurately replicate the true structure
of the Scottish economy.

Survey responses reflect the change, if any, in the current month compared to the previous month based
on data collected mid-month. For each of the indicators the ‘Report' shows the percentage reporting each
response, the net difference between the number of higher/better responses and lower/worse responses,
and the ‘diffusion' index. This index is the sum of the positive responses plus a half of those responding
‘the same'.

Diffusion indexes have the properties of leading indicators and are convenient summary measures
showing the prevailing direction of change. An index reading above 50 indicates an overall increase in
that variable, below 50 an overall decrease.

Markit do not revise underlying survey data after first publication, but seasonal adjustment factors may be
revised from time to time as appropriate which will affect the seasonally adjusted data series. Historical
data relating to the underlying (unadjusted) numbers, first published seasonally adjusted series and
subsequently revised data are available to subscribers from Markit. Please contact
economics[AT]markit.com.

About Bank of Scotland
Bank of Scotland is part of Lloyds Banking Group, the UK's largest retail bank and Scotland's largest
financial services employer. Established in 1695, Bank of Scotland is the UK's oldest surviving clearing
bank. Our goal is to be the best financial services provider in Scotland. We believe this means we must
build a leadership position not on the basis of scale but on the foundations of reputation and
recommendation.

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