THE Scottish economy's return to growth suffered a setback last month in the face of stuttering home and international demand.

November saw the Bank of Scotland PMI, the index tracking the combined output of Scottish manufacturers and service providers, fall from 50.7 in October to 50.3, signalling only marginal growth, and in line with the trend recorded across the UK economy.

The reading is a modest retreat from what had appeared to be an upward trend after a deterioration in the economy in the summer.

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Employment was at least stable for the third month in a row, and unlike October manufacturing pulled its weight in maintaining job levels.

"Operating conditions for businesses north of the Border remained challenging in November," the report says. "Output levels continued to rise only marginally, owing to further weakness in new business inflows."

Cost pressures from fuel, labour and raw materials remained intense, and margins were squeezed as prices stuck amid a weakening trend in demand.

Factories reported a fall in output for the fifth month in a row as manufacturers failed to boost exports, the report said. "However, the overall rate of contraction was only marginal, and unchanged from that registered in the preceding survey period," it said.

The combined economy has been battling a fall in the average order book since July.

"The level of new orders received by manufacturers operating in Scotland decreased again during November, stretching the ongoing sequence of decline to eight months," the report said. "Albeit the weakest since July, the overall rate of contraction was still solid."

After contracting in the previous three months, jobs in the manufacturing sector held up in November.

"Firms that recruited additional staff over the month mentioned attempts to reduce backlogs and hiring to coincide with the launch of new products," the report says. "On the other hand, job losses were linked to lower workloads."

The service sector, meanwhile, failed to build on five straight months of gains as numbers stagnated, with low demand blamed.

There was evidence of spare capacity at Scottish businesses in November, with backlogs of work reduced for a 15th straight month. The rate of decline was little changed from October's modest pace, however, and weaker than that seen across the UK as whole.

Average input prices faced by Scottish firms continued to rise at a marked rate, in part reflecting the increased cost of oil and related products. The pace of inflation was slightly faster than the historical trend, and well above the UK level.

But despite the considerable rise in cost burdens, output prices increased only marginally on average, and the increase was the weakest in the current four-month sequence.

Donald MacRae, chief economist at Bank of Scotland, said: "The Scottish economy is showing the strains of maintaining growth momentum against a background of weak domestic and international demand.

"Despite this challenging environment, employment was maintained in the month."

Mr McRae warned a month ago, despite the recent rally, that there were "few signs yet of a sustained recovery".