Monthly economic brief: March 2023

Businesses

Business activity contracted further in January, however optimism improved.

Business activity

• The Purchasing Managers Index (PMI) business survey indicates that business activity in Scotland's private sector continued to contract in January (47.1) and at a faster pace than in December.^[4]

• The fall in business activity at the start of the year reflected a further reduction in incoming new business/orders (43.6), predominantly in the services sector, with respondents attributing the fall to the squeeze on disposable incomes amongst other factors.
• Despite this, business optimism strengthened sharply in January to its highest level since July last year (58.4) with expectations of increased activity over the coming year. However, the level of business optimism remained below the survey average, reflecting ongoing concerns regarding the cost of living challenges and their impacts on prospects for growth.

Business costs

• Higher energy, materials and staffing costs continue to present significant challenges for businesses, however there are further indications at the start of the year that the pace of cost increases is easing.
• 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) rose by 14.1% over the year to January, though the annual rate eased for the sixth consecutive month and prices fell by 0.1% over the month.^[5]
• Input fuel costs have increased the most over the past year (61%) followed by imported food materials (26%) with crude oil input falling 0.1%. Over the month of January, most input cost categories fell; fuel prices (-2.5%), crude oil (-8.7%) and chemicals (-0.4%).
• Similarly output price inflation also continued to ease back in January to 13.5% in January, down from the recent peak of 19.9% in July, but also remains elevated. Over the month of January, output prices for petroleum products fell 2.7%, however food product prices continued to rise by 1.1%.

• PMI business survey data for Scotland also indicated that the pace of input price rises across the services and manufacturing sectors continued to moderate in January, while remaining elevated overall, with anecdotal evidence that higher wages, energy prices and raw material prices were continuing to drive up input costs.
• Business Insights and Conditions Survey (BICS) data provide latest insights into the effects on businesses of price rises. In February, 60.8% of businesses reported that they had to absorb costs, 35.8% reported having to pass on price increases to customers and 17.6% had to change suppliers. A much lower percentage of firms reported having to access more financial support (3.8%) and having to reduce staff work hours (6%).^[6]

• There continues to be notable differences across sectors. For example, 22.2% of Accommodation and Food sector businesses and 12.3% of Arts, Entertainment and Recreation businesses reported having to reduce staff work hours (compared to 6% for all businesses). Furthermore 33.4% of Professional, Scientific and Technical Activity businesses and 33.5% of Information and Communication businesses reported that they had not been affected by price rises (compared to 14.2% 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 concern for business in January and February continues to be energy prices (27.1%), which remains elevated, and inflation of good and services prices (23.7%), which has been decreasing through the turn of the year. Much lower and declining percentages of businesses are concerned about supply chain disruption (3.4%), which chimes with UK manufacturing PMI data for February indicating that suppliers' delivery times improved for the first time since 2019, particularly in areas where there was improved availability of materials or supplier capacity.^[7] Concerns about interest rates (including mortgages) (2.6%), fell slightly at the start of the year and remains low overall despite tightening monetary conditions. In February, the Bank of England raised the Bank Rate to 4%, the tenth successive rate rise since the end of 2021.