Monthly economic brief: December 2022

Businesses

Business activity weakens further in October as cost pressures remain elevated.

Business activity

• The Purchasing Managers Index (PMI) business survey indicates that business activity in Scotland's private sector continued to contract in October (45.8), with sharpening falls in activity across the manufacturing and services sectors.^[5]
• This has partly been driven by further falls in inflows of new business and orders (44.1) which contracted for a fourth consecutive month and at its fastest rate since February 2021. The fall in new business has been broad based across the sectors but has been most prominent in manufacturing which saw a sixth month of contraction.
• Business optimism overall remained positive and increased in October to 56.8. However, the level of optimism remains notably lower than earlier in the year.

• UK PMI data indicates a further fall in business activity in November, and at the same rate as in October (48.2), with incoming new business volumes falling at their fastest rate since the start of 2021 and continues to emphasise weaker demand and the cost of living pressures facing business.^[6]

Business costs

• Rising costs (energy, materials, staffing) present a significant challenge to business operations and resilience in the face of weakening demand.
• Producer price inflation (changes in the prices of goods bought and sold by UK manufacturers, including price indices of materials and fuels purchased and factory gate prices) has risen sharply over the past two years. In October, annual input price inflation was 19.2%, easing back from the recent peak of 24.2% in June, however remained elevated.^[7]
• The rise in input prices has been broad based across product groups. Crude oil input prices rose by 2.5% over the month and 43.8% annually, while imported home food material prices increased 31% annually and home food materials and chemicals increased by 18.7%.
• Output price inflation has also eased back in recent months to 14.8% in October, down from the recent peak of 17.3% in July, but also remains elevated. Over the year, the increase in input prices have largely been reflected in increased output prices with petroleum products prices increasing 40.6% annually, chemical and pharmaceuticals +20.1%, and food products +16.1%.

• PMI business survey data for Scotland also indicate that businesses are continuing to pass on higher costs to customers. Latest data for October indicates that while input and output price rises continued to moderate in the manufacturing sector, they re-accelerated in the services sector over the month with businesses citing higher wages and utilities and general inflation as the driving factors.
• Business Insights and Conditions Survey (BICS) data provide further insight into the effects on businesses of price rises. At the start of November, 57% of businesses reported that they had to absorb costs and 34% reported having to pass on price increases to customers. A much lower percentage of firms reported having to access more financial support (4%) and having to reduce staff work hours (4.5%), however both have increased from earlier in the year indicating that businesses are adopting a broad set of approaches to tackling the persistence of cost pressures.^[8]

• There are also differences in effects across sectors with 16.5% of Accommodation and Food businesses reporting having to reduce staff work hours (compared to 4.5% for all businesses) and 47% of information and communication businesses reporting that the business had not been affected by price rises (compared to 13.5% for all businesses).
• This further reflects that costs rises are impacting sectors differently and business responses to price rises will reflect a range of factors such as the nature of the business and customer base within sectors and the options available to improve efficiency and reduce costs.

• Overall, the main concerns for business in November were energy prices (32.7%) which has been on an upward trend over the second half of the year, and inflation of good and services prices (26.0%). Much lower and declining percentages of businesses are concerned about supply chain disruption (3.9%) while concerns about interest rates (including mortgages) (3.6%), remains low but has risen in recent months and may reflect the tightening financial conditions that businesses are facing from rising interest rates.