Jobs cut at fastest rate since 2003 as 'perfect storm' batters companies

SCOTTISH companies are shedding jobs at the fastest rate in more than five years as they battle an "uneasy combination" of weaker activity and higher inflation, experts will warn today.

The findings of the influential report from the Royal Bank of Scotland show output across the service and manufacturing sectors falling at the sharpest pace on record.

Meanwhile, the amount of new business hitting firms' order books shrank for the fourth month running in June, and input costs such as raw materials soared to a fresh high. Such conditions create an almost "perfect storm" of economic woes for Scotland's employers.

RBS has been publishing the so-called Purchasing Managers' Index (PMI) for the last ten-and-a-half years.

The latest research – which will make grim reading for the Chancellor Alistair Darling – is one of the clearest signs yet that an economic slump that has its roots in the US subprime meltdown is exacting a heavy toll closer to home.

It follows a raft of downbeat economic reports and forecasts, with many experts believing that the UK stands on the brink of recession.

RBS said jobs were being lost across the private sector at the fastest pace since March 2003.

The bank's survey paints a particularly gloomy picture for Scotland's service sector, which encompasses everything from hotels and restaurants to shops and banks. Over the past two months, the sector's seasonally adjusted employment index has signalled the fastest rates of job shedding in the survey's history.

David Fenton, head of microeconomics at RBS, said: "Scotland's private-sector economy lost further momentum in June, with the service sector hit harder than most. Difficult demand conditions were compounded by another increase in cost inflation, most notably in travel, tourism and leisure.

"All told, Scotland's performance is broadly in line with the rest of the UK, which features an uneasy combination of weaker activity and higher inflation."

The survey's main measure of business activity tumbled to 44.6 in June from 46.8 the month before and 48.3 in April. Any figure below the 50 "no-change" mark denotes contraction.

Across the UK, only three regions – Yorkshire and Humberside, east England and Northern Ireland – faired worse. Today's report, which is compiled for RBS by Markit Economics and polls more than 600 businesses, chimes with last month's business monitor from Lloyds TSB Scotland.

It found that Scotland was feeling the full effects of the global credit crunch with slowing output, rising costs and falling business expectations.

Worryingly, both reports suggest the slowdown is affecting the service sector more severely than manufacturing. Edinburgh's reliance on the financial services sector, which employs more than 100,000 people across Scotland, makes it more vulnerable to job cuts than other large UK cities.

According to RBS, companies battled with spiralling oil prices and energy bills last month, feeding through to a record rate of input cost inflation.

The findings will stoke inflationary fears, as the Bank of England attempts to bring the rate of consumer price inflation back down from 3.3 per cent to its goal of 2 per cent. Last week, the central bank held rates at 5 per cent, despite pleas from business leaders to lower borrowing costs and promote economic growth.

On a brighter note, RBS said employment levels had crept up in manufacturing, while orders gathered pace.

Mr Fenton added: "Activity also contracted in the manufacturing sector, though the rate of decline was less pronounced, and the modest increase in new orders suggests conditions might improve in the months ahead."

Real impact of credit crunch 'yet to arrive'

TWO-THIRDS of financial chiefs among the UK's top 350 companies believe the worst impact of the credit crunch is yet to come.

The forecast was made in a survey by professional services firm Deloitte of 83 chief financial officers.

Some 66 per cent disagreed with the statement by Henry Paulson, the US treasury secretary, in May that the worst of the crunch "is likely to be behind us".

The latest downbeat findings come after a week when business leaders at the British Chambers of Commerce warned of a "serious risk" of recession as corporate cashflow is coming under increased pressure.

Slowdown fears threaten new offices

A HUGE expansion to Edinburgh's main financial district may be shelved due to fears of a slowdown in the capital's office market.

Reviews have been ordered to two major developments in the Fountainbridge area – one of the biggest regeneration areas in the city.

Work on new commercial offices on the site of the former Scottish & Newcastle brewery, which was due to get under way last month, has been put off indefinitely. It is understood a hotel development is now considered a better financial option for the site.

The owner of a neighbouring site where work on new homes and offices was due to get under way months ago has also put the project on hold.

The transformation of the site of the old brewery social club – on the banks of the Union Canal – is understood to have been postponed for the foreseeable future. About 170 new homes are also planned along with a new pedestrian bridge over the canal.

But industry insiders say there are growing fears about the impact of the credit crunch.

It is also thought the deal by banking giant HBOS to snap up another former S&N building for a major new headquarters complex will lead to an over-supply of office space.

One source said: "A year ago this part of Edinburgh was a safe bet for new office space. Now, it's far from certain that there will be enough demand to justify what is effectively an extension of the financial district.

"Developers are likely to wait until schemes that are already coming out of the ground are completed before committing to building anything else in an area like this."

Another insider said: "HBOS's deal with S&N has changed the whole complexion of what this area may look like. The bank is unlikely to need all of its site for its own purposes and Fountainbridge could end up with too much office space."

Work is already under way on new homes and a student housing development as part of the Springside development, where the hotel is now being considered by the developers, Grosvenor and AMA and the Royal Bank of Scotland.

The developers may reserve space on the site for offices if the market improves in the next few years.