Monthly economic brief: July 2022

Businesses

Businesses growth momentum continues to ease with new orders and business confidence weakening most notably in the manufacturing sector.

Business activity and expectations

• The Purchasing Managers Index (PMI) business survey signalled that Scottish business activity continued to expand in June (54.4). However, the rate of expansion was the softest since January and was driven by the services sector (55.4) while manufacturing activity recorded a slight decline (49.9).[2]
• Growth in new business in June was the slowest since March 2021, with manufacturing new orders falling for a second consecutive month while new business in the services sector increased at a notably more moderate rate than in recent months. Business optimism overall remains positive with further recovery and a boost in economic conditions expected over the coming year, however cost of living concerns and falling consumer confidence eased the level of optimism to its lowest level since October 2020.

• Flash UK PMI data for July indicates that new order volumes continued to fall for manufacturing businesses with a lack of new work to replace completed orders, while business optimism remained stronger in the services economy and continued to moderate in the manufacturing sector.[3]

Business turnover and input costs

• The Business Insights and Conditions Survey (BICS)[4] provides regular insight into business financial performance as the economy continues its recovery from the pandemic and in the face of current headwinds.
• BICS data up to the start of May indicates that at an aggregate level, business turnover has been improving as Covid restrictions on the economy have been removed with a declining share of business reporting that turnover has decreased compared to normal and a rising share reporting that turnover has increased.

• When asked how business turnover in May compares to the previous month, 32% of respondents reported that turnover had increased (up from 24% in April), 45% reported it had stayed the same (down from 47%) and 17% reported it decreased (down from 20%).[5]
• Supply side challenges continue to be key factors impacting business activity with 36% and 26% of respondents respectively reporting that material costs and labour costs are impacting their business turnover.
• Intense input cost pressures continued in May with over half of all businesses reporting that prices had increased relative to April, (57%, up from 56% in April). Increased prices remained most widespread in accommodation and food services (73%), construction (66%), manufacturing (64%), and wholesale, retail and repair of vehicles (60%).

• In response to price rises, 58% of all businesses in May reported having to absorb costs (up from 50% in May), while 38% had to pass increased costs onto consumers. Scottish PMI data also indicated a further pass through of higher input costs to customers in June. Both the input costs indicator (81.4) and prices charged (64.3) continued to ease back from their series high levels in April, however remained elevated and reflected that firms are facing higher energy, materials and labour costs and have raised prices to offset the squeeze on margins.