SCOTTISH companies have suffered a "deeper and broader than expected" hit from the economic downturn, new economic data has found.

Output, new orders and backlogs all declined at survey-record rates in August, according to the latest Royal Bank of Scotland monthly Purchasing Managers' Index (PMI) report.

Scotland ranked worst of any region in the UK except Northern Ireland in terms of output and new orders, which both fell at the fastest rate in the survey's ten-and-a-half-year history.

The fall in output last month showed marked falls in activity in both the manufacturing and service sectors. The drop - to 41.9, well below an average UK figure of 49 - was the fifth consecutive monthly fall in activity, which has continuously increased in severity.

The incoming new business index came in at 38.9, down from 39.8 in July and registering the joint-sharpest fall of all UK regions monitored. A figure below 50 signifies contraction.

Staffing levels in the Scottish private sector fell sharply during August. Service sector firms cut staff at a faster overall rate than manufacturers.

David Fenton, head of microeconomics for RBS, said: "The Scottish economy is struggling to gain traction. As a small, open economy it was inevitable that the global slowdown would have an adverse effect on activity in the private sector. But the downturn has been deeper and broader than expected.

"The recent decline in sterling will boost competitiveness, and lower oil prices will ease some of the pressure on profit margins, but conditions are set to remain challenging for the rest of the year."

Manufacturers' gate prices increased at the fastest rate in the history of the survey in August, as firms struggled to protect diminishing profit margins. The input prices index was 72.2 - well above the 12-month and long-run series averages of 66.8 and 57.9 respectively.

The output prices index was 58.2, down from 58.7 in July.

Firms reported that the high input price inflation had left them no choice but to increase the prices they charged in order to protect their diminishing profit margins.

The drop in employment eased slightly last month, the index registering 47 - up from 46.7 in July. However, the report said the rate of staff-shedding was "solid", adding that the continued drop came from firms being reluctant to hire staff to amid falling output and new orders and considerably higher input costs.

Iain MacMillan, director of CBI Scotland, said: "Clearly the numbers coming out of the report are disappointing, but it is naive to think that Scotland is going to escape the economic downturn and we have to be braced for some bad news.

"However, we still think that in Scotland, while we will suffer a downturn, we will escape a full-scale recession."

Backlogs of work also contracted sharply in August, as firms came to the end of contracts. The level of work-in-hand, but not yet completed, declined at a pace well above the UK average, with firms indicating that the fall in order books had exposed spare capacity north of the Border.

Originally published by Jane Bradley Business reporter.

(c) 2008 Scotsman, The. Provided by ProQuest LLC. All rights Reserved.