Following a ten-month peak in April with a business activity index of 54.3, the index for May showed a downturn to 50.7, marking the weakest reading in the current growth sequence.

The service sector and manufacturing industry have experienced contrasting fortunes. While the service industry has continued to grow, albeit at a slower pace, the manufacturing sector has seen a contraction, with a second consecutive month of reduced new orders leading to a decline in goods output.

The overall growth in new business remained modest. New client acquisitions and the initiation of new projects were the main drivers of the positive growth, with the services sector seeing a more rapid expansion than the goods-producing sector.

Scottish firms continued to expand their workforce in May, marking the fourth consecutive month of job growth. The rate of job creation, although slightly softer than in April, was the fastest among the 12 UK regions surveyed. This hiring uptick was attributed to successful recruitment campaigns and the filling of long-standing vacancies, in anticipation of an increased workload.

However, it wasn’t all positive for Scotland’s private sector. Confidence levels across the region remained steady but were the third-weakest across the 12 surveyed UK regions. Inflationary pressures also continued to be a challenge. Rising wages, increased shipping costs, Brexit-related expenses, and wider inflationary trends were key factors in firms’ elevated cost burdens, pushing input costs to a three-year high.

Scottish firms raised their prices charged for goods and services in line with higher costs during May. The rate of inflation ticked down from April as a result of cooling charges for manufactured goods, but remained historically strong.

Judith Cruickshank, chair, Scotland Board, Royal Bank of Scotland, said: “Scotland’s private sector started the second quarter with a solid rise in output in April, but May’s data signal a loss of momentum as services growth slowed and manufacturing output fell for the first time in four months.

“The latest expansion in private sector output was the softest in the current sequence of expansion that began in February. Inflationary pressures cooled as cost burdens rose at the softest pace in two years. Nonetheless, both input price and output charge inflation remained stubbornly elevated, and much above their respective pre-pandemic trend levels.

“On a positive note, firms continued to expand workforce numbers. Moreover, solid hiring was reported across both sub-sectors. Additionally, optimism remained strong as private sector firms anticipated growth in the coming year.”