By Ian McConnell

GROWTH of Scotland’s private sector economy slowed sharply in December to its weakest pace in 10 months and manufacturing output fell, as concerns over the Omicron coronavirus variant weighed and supply-chain problems continued, a key survey shows.

Scotland was seventh out of 12 among the UK nations and regions in terms of its growth rate last month, according to the latest purchasing managers' index survey from Royal Bank of Scotland. London recorded the fastest expansion. Only north-east England saw a fall in overall private sector activity.

The business activity index for Scotland dropped from 55.9 in November to 52.7 last month on a seasonally adjusted basis. Although still comfortably above the level of 50 deemed to separate expansion from contraction, this fall signals a sharp slowdown in growth to the weakest rate in the current 10-month run of expansion.

Scottish services sector growth slowed last month, while factory production fell for the first time since September.

Growth of new work for companies north of the Border “eased noticeably… as some survey respondents noted that Covid-19 concerns had weighed on client demand”, Royal Bank observed.

Scottish private sector companies recorded an increase in employment for a ninth consecutive month in December. However, this rise was well below the UK average pace, with only Wales and north-east England seeing employment growth slower than that in Scotland last month.

Confidence among Scottish companies about the prospects for increased business activity on a 12-month horizon remained strong by historical standards last month.

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The survey shows inflation pressures remain elevated, although the rates of increase of costs and output prices slowed between November and December.

Royal Bank said: “Input prices faced by Scottish private sector firms continued to rise in December. Greater fuel, transport, staff and material costs, as well as shortages, Brexit and Covid-19 were all cited by panellists as drivers of inflation. Notably, the rate of increase in cost burdens eased only slightly from November's peak and was rapid overall.”

However, it noted that, among the 12 UK nations and regions, only London recorded a slower rate of cost inflation than Scotland in December.

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Malcolm Buchanan, who chairs Royal Bank’s Scotland board, said: “Scotland’s private sector grew at the weakest rate for 10 months as Omicron concerns weighed on client demand and supply issues continued to hinder companies, particularly in the manufacturing sector.

“Inflationary pressures also remained severe in December, although the latest data pointed to a slight easing of pressure as both cost burdens and average charges increased at slightly reduced rates.”

He added: “Nonetheless, firms remained upbeat towards activity over the next 12 months, with Scottish companies expecting Covid-19-related issues to subside and demand to improve as we enter 2022.”

Sebastian Burnside, chief economist at Royal Bank, said: "The resurgence of the pandemic in December put the brakes on the UK's economic recovery, with each nation and region feeling the effects as people changed their behaviour in response to rising cases. But, despite the similarities to previous waves, business activity levels seem to have been more resilient this time, due in part to comparatively lighter restrictions."

He added: "The labour market was a bright spot for all regions in December, as was the case throughout most of last year. Although in many instances the pace of job creation slowed, rates of employment growth generally remained solid by historical standards, supported by continued optimism towards growth prospects in 2022.”