Scotland’s private sector economy enjoyed “sustained and stable” growth in August, with optimism among companies rising to its highest in one-and-a-half years, a key survey shows.

Royal Bank of Scotland’s seasonally adjusted business activity index for the private sector economy north of the Border was 52.7 in August, unchanged from July and significantly above the 50 mark deemed to separate expansion from contraction.

Growth was again driven by the services sector, as manufacturing continued to experience a decline in activity, according to Royal Bank of Scotland’s growth tracker survey published today.

Scotland’s private sector economy was placed seventh out of the 12 nations and regions of the UK in terms of its growth rate in August, with Northern Ireland leading the way.

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Expectations for the year-ahead outlook for activity “continued to strengthen across Scotland's private sector in August”, Royal Bank noted.

It added: “The degree of confidence was the highest in one-and-a-half years and historically strong. Firms expect that market conditions and a lax borrowing climate will support growth in the year ahead.”

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Analysing the business activity readings for Scotland this year, as well as the composition of growth and confidence among companies, Royal Bank said: “The headline business activity index remained unchanged from the month prior and printed 52.7 in August. Expansions in activity across Scotland have now been noted in each month this year, with growth remaining skewed towards service providers. That said, companies in both sectors expect activity to rise in the coming 12 months, with overall sentiment the strongest in one-and-a-half years.”

Scotland achieved modest growth in overall private sector employment in August, the 19th consecutive month of increase.

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However, Royal Bank noted employment growth eased from July, and was the third-weakest in the current sequence of rises.

The bank said: “While private sector companies across Scotland continued to raise their staffing levels for a 19th successive month in August, the latest uptick was the third-weakest in the current sequence of growth. Again, job creation was driven by an uptick at service providers - where improving demand trends encouraged the intake of additional staff. Meanwhile, manufacturers continued to pare back their payroll numbers.”

Overall growth in new orders for Scotland’s private sector economy eased between July and August.

Judith Cruickshank, who chairs Royal Bank’s Scotland board, said: “The Scottish private sector continued to expand on the back of solid growth in activity observed across its service firms. Meanwhile, the manufacturing sector remained suppressed as deteriorating underlying demand trends continued to weigh down on production.”

She added: “While the service sector has been pivotal in supporting growth in private sector activity since the start of the year, there were some signs of cooling demand during August. Growth in new orders softened, and services employment also ticked up at a softer pace. That said, firms remain optimistic that growth in business activity will be sustained in the coming 12 months, with expectations across the Scottish private sector hitting an 18-month high. Meanwhile, business expenses increased at one of the weakest paces since February 2021."

Sebastian Burnside, chief economist at Royal Bank of Scotland, said of the overall UK results: "Our latest growth tracker report showed business activity rising across all 12 UK nations and regions in August, representing an improvement from the 10 that recorded an expansion in July.

“Renewed upturns were seen in the East Midlands and Wales, although it was Northern Ireland that remained the brightest spot in terms of outright growth. Business optimism generally softened in August, following a post-election bounce in growth expectations in most areas in July. Nevertheless, sentiment towards future activity remains positive across the board, which is helping to support labour market conditions.”

He added: "Alongside broad-based growth in business activity, it was encouraging to see price pressures ease in most areas, in what will be very welcome news for the Bank of England's policymakers. This will be something to watch going forward as we look to assess the direction of travel of inflation and the timing of further interest-rate cuts."