What lies ahead as Scotland’s private sector output hits seven-month high

Royal Bank of Scotland’s latest growth tracker - a seasonally adjusted index that measures the month-on-month change in the combined output of Scotland’s manufacturing and service sectors - rose to 50.9 last month from 50.5 in May. This marked a second consecutive monthly rise in business activity.

While the uptick was modest overall, RBS noted that it was the strongest result since November 2024.

As was the case in May, activity growth remained solely driven by the nation’s service sector. Service providers noted that new project funding and a rise in demand underscored the uptick in activity. In stark contrast, manufacturing production continued to fall sharply, according to the latest tracker report, published today.

The sustained rise in overall activity was accompanied by improved confidence regarding the year ahead outlook for output. Notably, the degree of optimism was the strongest in eight months, RBS added.

Judith Cruickshank, chair of the Scotland board at Royal Bank of Scotland, said: “Scotland’s private sector recorded a sustained uptick in activity at the end of the second quarter, with growth predominantly driven by service providers. In contrast, the manufacturing sector faced a challenging demand environment, leading to overall declines in new business and production.

“Despite these sectoral differences, firms exhibited increased optimism about the future, with manufacturers reporting positive growth forecasts for the first time in three months.

“In June, private sector firms encountered sharply rising operating costs, but selling price inflation slowed notably. This suggests a willingness among businesses to absorb some costs to bolster sales.

“The employment landscape remained broadly stable compared to the previous month, with sector data continuing to highlight diverging trends between manufacturers and service providers,” she added.

The UK as a whole saw output growth accelerate to a nine-month high, driven by expansions in business activity across eight of the 12 nations and regions monitored by the closely-watched survey.

Companies north of the Border recorded a ninth successive monthly fall in incoming new orders during June. That reduction in new work was centred on the manufacturing sector, as service-focused firms reported a further expansion. Although the overall rate of decrease was stronger than that seen in May, it was modest overall.

Private sector companies operating in Scotland remained optimistic about the year-ahead outlook for activity during June. The degree of positive sentiment edged up for a third straight month to the highest since October 2024, but was weaker than that recorded for the UK as a whole.

Confidence across Scotland was supported by plans to introduce new product lines, improved operational performance and “strategic marketing efforts”.

After a slight rise in employment in Scotland in May, workforce numbers were broadly unchanged last month. Sector data signalled that services firms increased their staffing levels amid upturns in new business and activity. However, this was offset by another month of job shedding at manufacturers.

A near universal fall in headcounts was noted across the 12 monitored UK regions and nations, with Northern Ireland being the sole exception to this trend. Among the remaining areas, Scotland experienced the least pronounced drop in employment and one that was described as “fractional”.

Nearly all of the 12 monitored UK regions and nations recorded a drop in backlogs in June. The north-east of England was the only area where levels of outstanding work rose.

Scottish companies signalled a further marked increase in average input costs last month. The rate of inflation quickened from May and was “historically elevated”, the report noted. Panellists often reported higher costs for materials, labour and energy, as well as rising supplier prices.

Firms across Scotland raised their output prices at a reduced rate in June. Though solid, the latest increase in charges was the slowest in 11 months and similar to that seen on average across the UK as a whole. Where higher charges were recorded, they were primarily attributed to the pass-through of increased operating expenses to customers.

Life or death

The largely positive findings from the latest growth tracker contrast with last week’s quarterly economic indicator from the Scottish Chambers of Commerce (SCC). That report suggested that businesses across all sectors were feeling the strain of April’s “life or death” hike in employer national insurance payments, putting growth plans on hold.

The survey of more than 400 firms north of the Border found that while confidence and sales actually improved over the quarter, ongoing cost pressures and concerns continued to impact growth and investment.

The indicator, which is produced in partnership with the University of Strathclyde’s Fraser of Allander Institute, found that taxation concerns have risen sharply in the past year, with 70 per cent of businesses citing increased worries regarding taxes, compared to 50 per cent in the second quarter of 2024. The SCC’s report also highlighted “significant challenges” around cashflow and profits, despite positive sales trends across the board.

Doug Smith, vice president of the Scottish Chambers of Commerce and chairman of the SCC Economic Advisory Group, said: “The latest findings paint a troubling picture: investment is frozen, employment is stagnating and concerns are growing around taxation at a time of economic uncertainty around tariffs, immigration, tax and general fiscal policy.

“These survey results highlight major concerns and challenges for Scottish businesses as a direct result of rising costs, particularly the increase in employer national insurance contributions. Every obstacle to sustaining cashflow and profits has a direct impact on confidence, investment, growth and jobs across all sectors.”

National insurance burden ‘life or death’ for Scottish firms as hiring and investment frozen