SCOTLAND’S private sector was in danger of stagnating last month, despite business confidence rising to a 20-month high, according to the latest Royal Bank of Scotland report.

The bank’s Purchasing Managers’ Index study found there was only fractional growth in the sector’s economy.

Overall, new business increased for the second month running. Amid softer demand conditions, firms cut workforce numbers for the first time in four months, though the reduction was only marginal.

The seasonally adjusted RBS Business Activity Index – a measure of combined manufacturing and service sector output – posted 50.1 in February, down from 52.0 in January, signalling a fractional rate of growth in private sector output in Scotland midway through the first quarter. While a renewed increase in production was registered at manufacturers, services activity declined for the first time since last May.

However, firms remained confident activity would rise over the coming 12 months, with business sentiment reaching its highest level in 20-months. Panellists linked optimism to hopes of improved demand conditions.

RBS Scotland board chair Malcolm Buchanan said the latest report provided mixed results.

“The Scottish private sector neared stagnation during February, with only a fractional rise signalled by the headline Business Activity Index, as renewed growth in manufacturing was largely offset by a mild reduction in service sector activity,” he commented.

“Meanwhile, overall new business increased only fractionally, amid reports of weak foreign demand and further uncertainty weighing on growth, while some firms responded to softer demand conditions by not filling vacancies, leading to a fall in workforce numbers for the first time in four months.

“On a positive note, business confidence climbed to a 20-month high, with anecdotal evidence linking optimism to hopes of improved client demand. Nonetheless, sentiment in Scotland was the second-lowest across the 12 monitored UK areas, with only Northern Ireland reporting a softer outlook.”

Of the 11 parts of the UK to report an increase during February, Scotland recorded the joint-lowest rate.

Some survey respondents reported that weak foreign demand and uncertainty had hindered growth.

Scottish private sector firms also recorded the first reduction in workforce numbers since last October, with panellists linking the decline to the non-replacement of leavers and weaker client demand, though the decline was only mild overall.

Meanwhile, there was evidence of further spare capacity during February with outstanding business falling, as it did in 16 of the past 17 months.

The data highlighted a further rise in cost burdens facing Scottish private sector firms, as has been the case in each month for four years. Greater raw material and wage costs were the main drivers of inflation during February, according to panellists. Albeit still sharp, the uptick was the softest for three months.

Average selling prices increased during February, as they did in each month since August 2016.

The rate of charge inflation decreased from January and was only mild, however.