The Scottish economy is on track to exit deep recession by the end of this year, Lloyds TSB Scotland claims in its latest quarterly business monitor.

This assertion is based largely on service companies’ expectations that turnover will rise in the next six months, even though survey respondents as a whole predicted a further marginal decline in sales over this period.

Predicting exit from recession, Lloyds TSB chief economist Donald MacRae also cites an improvement in other forward-looking indicators such as expected volumes of new business and export activity.

MacRae said: "The Scottish economy last year entered the worst recession for decades. Output decline has been sharp and large. However, this latest Business Monitor shows the service sector about to emerge from recession with production businesses some way behind. Most forward looking indicators are showing an increase in expectations for the remainder of the year suggesting a return to economic growth for the Scottish economy by the end of 2009.

"The effects of the recession are fading but the Scottish economy has yet to fully emerge from decline into growth."

Bank of England Governor Mervyn King yesterday cited signs of recovery by the wider UK economy in the third quarter.

King told the Treasury Select Committee: "Following a precipitate fall in economic activity at the end of last year and the start of this, there are now signs that growth has resumed in the third quarter."

However, highlighting continuing weakness in lending to individuals and businesses by recuperating banks and a move by households and companies to strengthen their own balance sheets, he added: "Looking further ahead, the strength and sustainability of the recovery is highly uncertain and the balance of risks to inflation around the 2% target remains on the downside."

King meanwhile revealed the Bank’s Monetary Policy Committee was considering reducing the rate of interest it pays commercial banks on reserves held at the central bank, if these exceeded a certain level. Some business leaders have called for such a move to try to prevent banks hoarding cash and thereby stimulate lending.

He was at pains to emphasise economic recovery could be "protracted".

King highlighted the impact of the bail-out of the financial sector and recession on the UK public finances, and declared: "Then looking further ahead, clearly the impact on investment, big falls in business investment, and the rise in unemployment pose questions about how quickly we can return to growth."

He reiterated his message, from the time of the Bank’s August inflation report, that it would take a long time for gross domestic product to return to its pre-recession levels.

UK GDP fell by a further 0.7% during the second quarter to leave it 5.5% lower than in the same three months of last year. In contrast, France and Germany exited recession in the three months to June, with each achieving quarter-on-quarter growth of 0.3%.

The latest official GDP figures for Scotland are for the opening three months of this year, when economic output north of the border fell by 2.4% quarter-on-quarter.

King told the committee: "Falls in output have broadly come to an end and we are beginning to see some very small signs of positive growth. It is important to remember that the very small positive growth rates or small falls in output in other countries in the second and possibly third quarter are really very small in comparison with a sharp fall in output that took place at the end of last year and beginning of this.

"So there is a long way to go before the level of output gets back to where it was."

The Lloyds TSB business monitor shows a sharp deceleration in the rate of decline in the turnover of Scottish service companies during the three months to August.

About 38% of service businesses reported a fall in turnover in the three months to August, but 31% enjoyed an increase.

The net 7% reporting a fall was an improvement on the balance of 19% suffering a decline in the previous three months -- signalling a sharp slowing of the rate of decline.

And a net 3% of Scottish service businesses predicted a rise in turnover in the six months to the end of February next year, with 29% forecasting a rise and only 26% expecting a fall. This was the first time in 15 months of the business monitor that service companies had, as a whole, predicted a rise in turnover in the coming six months.

But production businesses were in much poorer shape.

A net 24% of production businesses suffered a fall in turnover in the three months to August, with 44% suffering a drop and only 20% recording an increase. This was only a marginal improvement on the net 26% suffering a decline in the previous three months.

A balance of 10% of production firms predicted a decline in turnover in the six months to February, with 23% forecasting a rise but 33% braced for a decline. This meant that, overall, a net 1% of Scottish businesses forecast a decline in turnover in the six months to February.