The private sector in Scotland sunk into a deeper downturn in January, as lockdown measure stifled client demand and led some businesses to close temporarily.
The seasonally adjusted headline Royal Bank of Scotland Business Activity Index – a measure of combined manufacturing and service sector output – posted 33.3 in January, down from 47.3 in December, to signal a rapid drop in private sector output.
The latest reading – excluding the first lockdown period of March to May last year – was the lowest since the index began in 1998.
New work fell at a similarly sharp pace, with the decline also the most marked for eight months. As a result, companies made further cuts to staff numbers.
Despite the challenging conditions, sentiment improved during January, with business confidence the highest since early-2014 on the back of the continuing vaccine rollout, as well as hopes of looser restrictions and a timely economic recovery.
A fifth straight monthly reduction in inflows of new work was recorded during January. Respondents attributed the latest drop in new business to stricter Covid-19 related measures, which stymied client demand.
At the sector level, the fall was broad based, with business services registering much the steeper rate of decline. Scotland also registered the quickest drop in new work across the 12 monitored UK areas.
Scotland’s private sector firms recorded the strongest level of confidence, with regards to activity over the next 12 months since April 2014, during the opening month of the year.
Despite the continuing downturn, companies remained optimistic on the back of the vaccine rollout and amid hopes of looser restrictions and a solid economic recovery, according to anecdotal evidence.
Both manufacturers and service providers registered brighter outlooks during January.
Amid reports of redundancies, layoffs and use of the government furlough scheme, private sector employment in Scotland declined again during January.
The rate of job shedding was the slowest since February 2020, the first month in the current sequence, but still sharp overall.
Scottish service providers again reported more widespread job cuts than manufacturers.
Malcolm Buchanan, Chair, Scotland Board, Royal Bank of Scotland, said: “Stricter lockdown measures took a toll on the Scottish private sector during January, with the downturn worsening amid steep drops in both activity and new business.
“The falls remained slower than at the height of the first lockdown last spring, perhaps reflective of companies adapting to restrictions, but were still severe.
“Positive news again came from business confidence, which was the strongest since April 2014 amid hopes of an economic recovery once restrictions are lifted,” he concluded.
“Conditions will remain very challenging in the meantime, but there is a light at the end of the tunnel for Scotland’s economy as the vaccine rollout progresses and measures are loosened.”