The seasonally adjusted headline Royal Bank of Scotland Business Activity Index - a measure of combined manufacturing and service sector output - posted 47.3 in December, unchanged from November’s reading, and signalled a further moderate contraction in private sector output as ongoing lockdown measures continued to stifle client demand.

Nonetheless, firms held an optimistic outlook for activity during 2021, with sentiment hitting a ten-month high. Panellists linked confidence to hopes of a timely end to the pandemic amid vaccine rollouts, and a swift economic recovery.

December data signalled a further fall in inflows of new work to Scottish private sector firms, extending the current sequence of reduction to four months. According to respondents, lockdown measures had continued to stifle client demand. The rate of decline was the joint-slowest in the aforementioned sequence, but still solid overall.

At the sector level, a further sharp contraction in services new business outweighed a quicker upturn in manufacturing order book volumes.

The Future Output Index registered above the 50.0 mark in December to signal a robust level of confidence among Scottish companies with regards to activity throughout 2021.

Moreover, the level of positive sentiment was the highest since February and elevated in the context of the series history. Hopes of a timely end to the COVID-19 pandemic amid positive news of a vaccine rollout and subsequent economic recovery were cited by panellists as reasons to be confident.

An eleventh successive monthly reduction in staffing levels at Scottish private sector firms was recorded in December. Respondents attributed the latest job cuts to the COVID-19 pandemic. There were also mentions of redundancies and use of the government furlough scheme in anecdotal evidence.

The rate of job shedding was little changed from November and solid overall, with Scotland also registering the fastest decline in employment across the 12 monitored UK areas.

Amid ongoing weakness in client demand and further reductions in new orders and business activity, Scottish companies continued to work through outstanding business in December. Moreover, the rate of backlog depletion was the most marked since June.

Across the 12 monitored UK areas, Scotland recorded the quickest reduction in outstanding business.

Scottish private sector firms signalled a further rise in cost burdens during December, with the rate of increase the most marked since February. The latest round of cost inflation was attributed by panellists to price hikes at suppliers and expenditure on Brexit preparation.

At the sector level, the rise in input prices was broad-based, with manufacturers recording the sharper rate of inflation.

A back-to-back increase in average charges levied by Scottish private sector firms was recorded in December. Panellists linked the latest uptick with the partial pass-through of greater costs to clients. The rate of charge inflation was only modest, albeit faster than that at the UK level.

Malcolm Buchanan, chair, Scotland Board, RBS, said: “Scotland’s economy continued to face challenges in December as demand faced further pressure from COVID-19 related measures. Ongoing weakness in services outweighed accelerated manufacturing growth and led to a moderate drop in activity across the private sector as a whole at year end.

“The reduction in new orders eased, however, with some firms reporting an upturn in orders due to higher confidence.

“Companies themselves registered the strongest level of optimism with regards to activity over the next year since February, as positive vaccine news buoyed expectations. But, with new restrictions in place to curb rising case numbers, the economy is likely to face further pressure before we experience marked improvement.”