SCOTLAND’s private sector economy approached stagnation last month as it grew fractionally, according to the latest Royal Bank of Scotland PMI.

Order books increased a second month running, the bank said, but added growth here was driven entirely by demand for services as manufacturing sales dropped sharply.

Challenging conditions were also highlighted by employment declining for the first time since May 2017, while business confidence dipped to a 35-month low.

July’s stagnation was underpinned by Brexit uncertainty, slower global growth and concerns regarding the UK economy, RBS explained.

Overall, the seasonally adjusted Royal Bank of Scotland Business Activity Index – a measure of combined manufacturing and service sector output – posted 50.2 in July, down from 51.3 in June.

Malcolm Buchanan, chair of the Scotland Board at Royal Bank of Scotland, said: “Having been one of the top-performing areas of the UK in June, Scotland’s private sector approached stagnation at the start of the third quarter, growing only fractionally.

“The main source of weakness remained manufacturing, where production was cut back at a sharper rate amid a deeper downturn in demand. Slowing global growth remained a key factor that panellists attributed challenging manufacturing conditions to.

“That said, the recent bout of sterling depreciation may act as a temporary boost to sales for Scottish manufacturers, although this will come at a price of greater imported costs.

“Scotland’s private sector remains dependent on services and sustained appetite from the domestic market. Whether services growth can continue to offset the manufacturing sector’s plight remains key, although the drop in business confidence to a 35-month low in July was underpinned by concerns towards the UK economy, raising question marks as to whether the positive growth trend in services can continue.”

The bank said its latest survey data signalled back-to-back gains in new business at Scottish private sector firms in July.

New client wins reportedly lifted sales at service providers, but manufacturers mentioned uncertainty and softer underlying demand conditions such as factors restricting new work inflows. Overall, aggregate order book volumes increased modestly, but at a slower rate than seen on average.

Hiring was also affected last month as relatively subdued demand conditions

filtered through, with employment levels falling for the first time in two years – in this area, the trend in Scotland diverged from the UK overall where job creation was sustained.

RBS research showed the drop in staffing levels was driven by goods producers, as workforce numbers were held mostly stable in the service sector. Meanwhile, a 10th successive monthly reduction in backlogs of work was recorded in Scotland, indicating spare capacity.

A softening of inflationary pressures was signalled by the July data, with manufacturers and service providers reporting slower rises to input costs and prices charged.

Looking ahead, companies say they expect output volumes to be higher than present levels in 12 months’ time, but the degree of confidence was the lowest in nearly three years.