BUSINESS activity picked up in Scotland in the first quarter, according to a key survey that will boost hopes the economic recovery is gathering pace.

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The Scottish Chambers of Commerce said the results of its latest quarterly survey showed businesses made a better start to 2012 than they did to 2011, with firms in manufacturing and tourism leading the way.

The survey found that, with trends in orders and sales improving in most sectors, confidence has increased about the outlook for this year.

Among tourism businesses expectations for the year ahead are at their highest levels for four years.

The results point to a marked improvement in sentiment since the previous survey was completed in the fourth quarter last year. The outlook for the economy was clouded then by the problems in the Eurozone.

The fourth quarter results indicated activity slowed in the second half of 2011 and included few signs of any improvement in 2012.

Firms in Scotland appear to have benefited recently from the improvement in trading conditions which has occurred as the threat of a meltdown in the Eurozone has receded.

Scottish Chambers of Commerce said the latest survey results suggest the manufacturing sector has returned to "modest growth" after a difficult latter half of last year.

"The rising trend in export orders, which until a decline last quarter, had been a feature of the past four quarters, resumed and respondents now anticipate an increase," said Scottish Chambers.

The results of the survey, produced with the Fraser of Allander Institute at Strathclyde University, add to a growing body of research findings that suggest Scotland will avoid a double dip recession.

The latest Bank of Scotland PMI report indicated the pace of output growth accelerated strongly in March.

However, Garry Clarke, head of policy and public affairs at Scottish Chambers of Commerce, said: "The recovery remains tentative and uncertain,"

Scottish Chambers said continuing consumer uncertainty and ongoing public-sector spending cuts will be important factors in 2012. The survey highlighted big variations in confidence between sectors and regions.

Retailers are resorting to widespread discounting in the face of falling sales.

"In retail declining business confidence was again widespread reflecting weak continuing consumer confidence and spending," the chambers said.

While construction firms reported better first quarter trends than in previous years, demand remains weak and there is widespread pressure on margins.

Mr Clarke highlighted findings that suggest increases in transport costs are weighing especially hard on businesses in rural and island areas.

He said: "Governments at both the UK and Scottish level need to act to support and encourage the recovery and to recognise that a 'one size fits all' approach is not always appropriate and specific measures may be required to ensure rural and island businesses can grow and remain competitive.

"This is particularly true in terms of fuel and transport costs and, unless these are addressed, it may become more difficult for rural and island businesses to attract new customers."

Mr Clarke said the UK Government should extend the reduced rate of VAT, 5%, to tourism-related businesses. Scottish Chambers of Commerce wants the Scottish Government to be able to vary the rate of Air Passenger Duty to help boost tourism businesses and exporters.

Read the full survey here