Business activity increases at quickest rate since July despite new orders rising at slower pace Inflationary pressures remain substantial

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1 Output rises at fastest pace for 19 months Bank of Scotland is part of Lloyds Banking Group, the UK s largest retail bank and Scotland s largest financial services employer. Established in 1695, Bank of Scotland is the UK s oldest surviving clearing bank. Our goal is to be the best financial services provider in Scotland. We believe this means we must build a leadership position not on the basis of scale but on the foundations of reputation and recommendation. Bank of Scotland The Mound Edinburgh, EH1 1YZ Tel: mairi.gordon@lloydsbanking.com The Bank of Scotland PMI (Purchasing Managers Index ) is produced by IHS Markit. The report features original survey data collected from a panel of around 0 companies based in Scotland and operating in both manufacturing and service sectors. The panel has been carefully selected in order to accurately reflect the true structure of the Scottish economy and therefore provide an accurate picture of business conditions in the region. The Scotland survey forms part of a series of regional surveys and is derived from the highly regarded national PMI survey produced by IHS Markit. IHS Markit Henley on Thames Oxon RG9 1HG, UK Tel: Fax: Key findings: Business activity increases at quickest rate since July despite new orders rising at slower pace Inflationary pressures remain substantial February survey data pointed to a further improvement in the health of Scotland s private sector, as output increased at the quickest extent since July New business levels also rose, albeit at a slower rate, while optimism in the sector towards the 12-month outlook for growth remained solid. Staffing levels declined for a second successive month while firms again worked through their backlogs of work. On the price front, a substantial increase in input costs led companies to raise their selling prices further. The seasonally adjusted headline Bank of Scotland PMI - a single-figure measure of the month-on-month change in combined manufacturing and services output - reached a 19-month high of Up from 51.2, the latest figure signalled a stronger expansion of Scotland s private sector in February. Manufacturers raised production at the quickest pace for just over three years, while a subdued rise in business activity was recorded by service sector companies. Scottish private sector companies recorded a third successive monthly increase in new business levels during February. While some firms linked growth to greater marketing efforts, others cited increased activity in the oil and gas sector. That said, that rate of expansion eased since the start of the year and was only marginal. Both manufacturing and service sector companies recorded a weaker rate of new order growth..0 = no change on previous month Bank of Scotland PMI summary Job cuts were again evident in Scotland s private sector during February, the second month straight that this has been the case. The rate of job shedding was unchanged since the start of 2017 and only slight overall. According to anecdotal evidence, the fall in staffing levels reflected economic uncertainty and a reduction in workloads. Latest survey data also pointed to a further decline in the volume of unfinished business held at Scottish private sector companies, continuing a trend which has been observed in every month since January The rate of decrease was solid and stronger than the average for the aforementioned period. Higher raw material costs, unfavorable exchange rate movements and an increase in average wages contributed to a sharp rise in input prices faced by Scotland s private sector firms in February. Moreover, the rate of inflation continued to outstrip the historical average. Meanwhile, firms raised their selling prices at the second-quickest rate since April 2011, as firms cited passing on higher costs on to clients. The latest increase was driven by Scotland s manufacturing companies reporting the sharpest rate of inflation for months. Finally, business optimism in Scotland s private sector remained substantial in February. That said, the level of positive sentiment weakened from January s 20-month high. The intellectual property rights to the Bank of Scotland PMI provided herein are owned by or licensed to IHS Markit. Any unauthorised use, including but not limited to copying, distributing, transmitting or otherwise of any data appearing is not permitted without IHS Markit s prior consent. IHS Markit shall not have any liability, duty or obligation for or relating to the content or information ( data ) contained herein, any errors, inaccuracies, omissions or delays in the data, or for any actions taken in reliance thereon. In no event shall IHS Markit be liable for any special, incidental, or consequential damages, arising out of the use of the data. Purchasing Managers Index and PMI are either registered trade marks of Markit Economics Limited or licensed to Markit Economics Limited. Bank of Scotland use the above marks under license. IHS Markit is a registered trade mark of IHS Markit Limited. March 13 th 2017 Blue line: Output Black line: Employment Composite index summary Output New Business Backlogs of Work Employment Input Prices Output Prices Future Scotland UK Scotland UK Scotland UK Scotland UK Scotland UK Scotland UK Scotland UK Dec' Jan' Feb

2 Manufacturing: Output and Future Output Q. Compare your level of output/production this month with the situation one month ago Sep Oct Nov Dec Jan Feb February survey data pointed to a further increase in Scottish manufacturing production, continuing the current sequence of growth which started in August last year. In fact, the rate at which output expanded was the sharpest for 37 months and was substantially stronger than the long-run historical average. Panel members linked the rise in output to a combination of improved productivity and stronger underlying demand. Business confidence in Scotland s manufacturing sector strengthened in February, as highlighted by the Future Output Index posting further above the.0 neutral threshold. The level of positive sentiment amongst goods producers was the highest for eight months, with firms reflecting on improved marketing campaigns, an upturn in the oil industry and expansions into new markets. Q. In 12 months' time, do you expect the overall volume of output at your unit to be higher, the same or lower than now? 2016 Sep N/A Oct N/A Nov N/A Dec N/A 2017 Jan N/A Feb N/A.0 = no change on previous month Blue line: Output Black line: Future Output Manufacturing: New Orders and New Export Orders Q. Compare the level of new orders received (UK and export) this month with 2016 Sep Oct Nov Dec Jan Feb New business levels received by Scotland s goods producers rose for a fourth month straight during February. That said, the rate of increase weakened from January s 29-month high and was only moderate. One-infour panel members recorded a rise in new orders during the month, while around 20% of firms registered a decline. Latest survey data pointed to a decline in new export orders received by Scottish manufacturers, bringing to an end a six-month period of growth. That said, the rate at which new business from abroad contracted was only marginal and weaker than the long-run series average. Firms which recorded a fall in demand from foreign clients partly reflected on greater competitive pressures within the marketplace. Q. Compare the level of new export orders received this month with the 2016 Sep Oct Nov Dec Jan Feb = no change on previous month Blue line: New orders Black line: New export orders Manufacturing: Employment and Backlogs of Work Q. Compare the no. of people employed this month with the situation one month ago (treat two part-time as one full-time & ignore temps) Sep Oct Nov Dec Jan Feb Scottish manufacturers added to their staffing levels midway through the first quarter of the year. The latest increase, albeit marginal, followed a slight contraction in staffing levels reported during January. Rising workloads were the main factor driving job growth in the sector during February. The seasonally adjusted Backlogs of Work Index posted exactly at the.0 neutral threshold in February, thereby signalling a stabilisation of outstanding business levels in Scotland s manufacturing sector. Moreover, latest survey data brought to an end the sequence of deteriorating backlogs which had been evident in the sector since June Q. Compare the level of outstanding business in your company this month with 2016 Sep Oct Nov Dec Jan Feb = no change on previous month Blue line: Backlogs of work Black line: Stocks of finished goods 25 All Intellectual Property Rights owned by IHS Markit 2

3 March 13 th 2017 Manufacturing: Stocks of Purchases and Stocks of Finished Goods Q. Compare your stocks of purchased goods in units this month with the 2016 Sep Oct Nov Dec Jan Feb The seasonally adjusted Stocks of Purchases Index remained below the neutral.0 threshold during February, thereby signalling a further deterioration in pre-production inventories held by Scottish manufacturers. The latest decline lengthened the current sequence to six consecutive months. There was some evidence linking falling stocks of purchases to firms satisfying higher new order intakes. Scottish manufacturers recorded a fall in volumes of finished goods stock in February. The latest decline continued a trend which was first observed in May last year. In fact, the rate at which post-production inventories decreased was the quickest for 86 months. Q. Compare your stocks of finished goods in units this month with the situation one month ago Sep Oct Nov Dec Jan Feb = no change on previous month Blue line: Stocks of purchases Black line: Stocks of finished goods Manufacturing: Quantity of Purchases and Supplier Delivery Times Q. Compare the quantity of items purchased (in units) this month with the 2016 Sep Oct Nov Dec Jan Feb Buying activity in Scotland s manufacturing sector increased for the first time in four months during February. The rate of increase was moderate, but accelerated to a two-year high. Around 24% of firms reported higher input buying during the month, with some panellists reflecting on forecasts of rising input prices. The seasonally adjusted Supplier s Delivery Times Index remained below the crucial.0 no-change mark in February, thereby signalling a further deterioration in vendor performance. Average lead times have now lengthened in each of the past 17 months, while the latest increase was sharper than the average for the aforementioned trend. Longer delivery times reflected greater supplier workloads. Q. Compare your suppliers' delivery times (volume weighted) this month with 2016 Sep Oct Nov Dec Jan Feb = no change on previous month Blue line: Quantity of purchases Black line: Suppliers' delivery times Slower deliveries Quicker deliveries Manufacturing: Input prices and Output prices Q. Compare the average price of your purchases (volume weighted) this month with 2016 Sep Oct Nov Dec Jan Feb Input prices in Scotland s manufacturing sector increased at one of the sharpest rates in the survey s history during February, with firms contributing this to a combination of exchange rate movements and higher raw material costs. Moreover, over half of panellists registered a rise in input costs during the month. Higher average cost burdens have been reported in each of the past ten months of data collection. In line with the trend for input prices, Scottish goods producers raised their selling prices further in February, the eighth successive month that this has been the case. Moreover, the rate of inflation accelerated to a -month high. Panel members which reported a rise in output charges reflected on the passing on of higher costs to clients. Q. Compare the average price charged for your goods (volume weighted) this month with 2016 Sep Oct Nov Dec Jan Feb = no change on previous month Increasing rate of inflation Blue line: Input prices Black line: Output prices Increasing rate of deflation 3

4 Services: Business Activity and Employment Q. Compare your level of business activity (gross income, chargeable hours etc.) this month with 2016 Sep Oct Nov Dec Jan Feb The seasonally adjusted Business Activity Index posted just above the.0 neutral threshold in February, thereby signalling a slight increase in output at Scottish service sector companies. Firms recording a rise partly reflected on an uptick in new business received, while falling activity was associated with economic uncertainty. Meanwhile, Scotland s service providers reduced their employment for a second successive month midway through the first quarter of the year, with some firms linking this to reorganisation efforts. Although the rate of job shedding quickened to the sharpest for ten months, it was still only marginal as the majority of panel members (nearly 83%) left their workforce numbers unchanged during the month. Q. Compare the no. of people employed this month with the situation one month ago (treat two part-time as one full-time & ignore temps) Sep Oct Nov Dec Jan Feb = no change on previous month Blue line: Business activity Black line: Employment Services: New Business and Business Outstanding Q. Compare the amount of new business at your company (whether already fulfilled or not) this month with 2016 Sep Oct Nov Dec Jan Feb Scotland s service sector companies reported a further rise in new business levels during February, continuing a trend which has been evident in the past three months. However, the rate of expansion was only slight and remained weak in the context of historical data. While travel, tourism & leisure and financial services firms recorded new order growth during the month, a decline was reported at business services providers. February survey data pointed a further decline in outstanding business held in Scotland s service sector, lengthening the current sequence of deterioration to six successive months. In fact, the rate at which backlogs of work decreased quickened to the sharpest since June last year. Q. Compare the amount of business outstanding (i.e. work in hand but not yet completed) this month with 2016 Sep Oct Nov Dec Jan Feb = no change on previous month Blue line: Incoming new business Black line: Business outstanding Services: Average Costs/Input Prices and Average Prices Charged Q. Compare the average prices paid by your company for all purchases, wages/salaries etc. this month with 2016 Sep Oct Nov Dec Jan Feb Average cost burdens faced by Scotland s service providers rose further in February, as highlighted by the respective seasonally adjusted index posting above the.0 neutral threshold. Although the rate of inflation again weakened further from December s recent peak, it remained substantial overall and was strong in the context of historical data. Higher average wages, exchange rate movements and rising fuel costs were some of the factors behind the increase in input costs. February survey data also highlighted a further increase in average selling prices in Scottish service providers, continuing a trend which has been observed since August last year. That said, the latest increase in output charges eased to the weakest in three months. Q. Compare the average prices charged by your company (e.g. prices per service or unit of time) this month with 2016 Sep Oct Nov Dec Jan Feb = no change on previous month Blue line: Input prices Black line: Output prices Increasing rate of inflation Increasing rate of deflation All Intellectual Property Rights owned by IHS Markit 4

5 March 13 th 2017 Services: Future Business Expectations Q. In 12 months' time, do you expect the overall volume of output at your unit to be higher, the same or lower than now? 2016 Sep N/A Oct N/A Nov N/A Dec N/A 2017 Jan N/A Feb N/A.0 = no change on previous month 85 The Future Business Activity Index continued to indicate positive sentiment amongst Scottish service sector companies towards the yearahead outlook for output. That said, optimism weakened from January s 21-month high and was below the historical average (68.3). New projects, greater export orders and expanding into new markets helped boost business confidence at service providers during the month. Blue line: Business Expectations Bank of Scotland PMI: Notes and Methodology PMI surveys Purchasing Managers Index (PMI ) surveys are monthly surveys of carefully selected companies which provide an advance indication of what is really happening in the private sector economy by tracking variables such as output, new orders, employment and prices across both manufacturing and service sectors. The PMI surveys are based on fact, not opinion, and are the first indicators of economic conditions each month. The data are collected using identical methods in all countries and regions so that accurate comparisons may be made. Questionnaires are completed in the latter half of each month and are collected and processed by economists at IHS Markit. Respondents are asked to state whether business conditions for a number of variables have improved, deteriorated or stayed the same compared with the previous month. Index numbers Index numbers are calculated from the percentages of respondents reporting an improvement, no change or decline. These indices vary between 0 and 100 with readings of exactly.0 signalling no change on the previous month. About Bank of Scotland Bank of Scotland is part of Lloyds Banking Group, the UK s largest retail bank and Scotland s largest financial services employer. Established in 1695, Bank of Scotland is the UK s oldest surviving clearing bank. Our goal is to be the best financial services provider in Scotland. We believe this means we must build a leadership position not on the basis of scale but on the foundations of reputation and recommendation. Readings above.0 signal an increase or improvement; readings below.0 signal a decline or deterioration. Reasons given by survey respondents for any changes are analysed to provide insight into the causes of movements in the indices and are also used to adjust for expected seasonal variations. The indexes are seasonally adjusted to take into consideration expected variations for the time of year, such as summer holiday shutdowns and national holidays such as Christmas. IHS Markit do not revise underlying survey data after first publication, but seasonal adjustment factors may be revised from time to time as appropriate which will affect the seasonally adjusted data series. Purchasing Managers Index (PMI ) surveys are now available for over countries and also for key regions including the eurozone. They are the most closely-watched business surveys in the world, favoured by central banks, financial markets and business decision makers for their ability to provide upto-date, accurate and often unique monthly indicators of economic trends. To learn more go to Bank of Scotland The Mound Edinburgh, EH1 1YZ Tel: mairi.gordon@lloydsbanking.com About IHS Markit IHS Markit (Nasdaq: INFO) is a world leader in critical information, analytics and experise to forge solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than,000 key business and government customers, including 85 percent of the Fortune Global 0 and the world s leading financial institutions. Headquartered in London, IHS Markit is committed to sustainable, profitable growth. Warning The intellectual property rights to the Bank of Scotland PMI provided herein are owned by or licensed to IHS Markit. Any unauthorised use, including but not limited to copying, distributing, transmitting or otherwise of any data appearing is not permitted without IHS Markit s prior consent. IHS Markit shall not have any liability, duty or obligation for or relating to the content or information ( data ) contained herein, any errors, inaccuracies, omissions or delays in the data, or for any actions taken in reliance thereon. In no event shall IHS Markit be liable for any special, incidental, or consequential damages, arising out of the use of the data. Purchasing Managers Index and PMI are either registered trade marks of Markit Economics Limited or licensed to Markit Economics Limited. IHS Markit is a registered trademark of IHS Markit Ltd. All Intellectual Property Rights owned by IHS Markit 5