Scotland's private sector economy has continued its recovery into the second half of the year though manufacturing exports are suffering from the strong pound, the latest Bank of Scotland PMI report has revealed.

Output increased at a sharp and accelerated rate in July, as highlighted by the seasonally adjusted Bank of Scotland PMI index - a measure of the month-on-month change in combined manufacturing and services business activity. It climbed to a six-month high of 56.8, up for the second straight month from 55.9 in June and 54.0 in May. Despite the steady recovery, it is the first time in more than a year that the index has registered back-to-back increases.

Donald MacRae, chief economist at Bank of Scotland, said: "The recovery continues with the Scottish economy entering the second half of the year in growth mode."

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The latest rise in business activity came on the back of another strong increase in incoming new work. Although weaker than in June, the rate of growth in total new business remained much faster than the historical series trend. In contrast, export orders at manufacturers decreased for the fifth time in the past six months as exporters battled the strength of sterling.

Last week's UK figures showed manufacturing output up by a smaller-than-expected 0.3 per cent with analysts warning that the strength of the pound and the weakness of the eurozone economies may be holding back growth in the sector.

However, Scottish manufacturing output rose at the fastest rate in four months in July, the pace of expansion having accelerated for the second month in succession. Close to one quarter of surveyed businesses registered an increase in production levels on the prior month, often citing new orders. Factory output north of the Border has now risen in 15 of the past 16 months.

Manufacturers are also helping to drive employment growth. The report says: "Although the slowest for five months, the pace of job creation in the goods-producing sector remained marked and faster than at any point in the series prior to the recent strong period of recruitment activity. Among the roughly 21 per cent of firms that added to their payrolls there was frequent mention of the need to expand capacity in line with higher workloads."

The service sector also saw growth accelerate, at its joint-fastest rate in the past nine months, driven by continued buoyancy in new work. "The current sequence of rising service sector output now extends to 43 months, with growth remaining broad-based across the three sectors monitored by the survey and slowing only in financial intermediation," the report says.

The sector also made a positive contribution to job creation, recording net employment growth for the 26th month in a row. Hiring was centred on business services and the travel, tourism and leisure sectors. The overall rise in employment was slightly less marked than in June, however, and also slower than that seen across the UK as a whole. Businesses were generally able to keep on top of workloads during July, with data showing broadly no change in the level of outstanding business north of the Border.

The rate of increase in input prices at Scottish private sector firms eased back last month, and was below the long-run series average. But one key source of inflationary pressure on the cost side was salary increments, according to panel member reports, with a number of firms highlighting the need to improve pay in order to retain staff. Output prices rose moderately, as the rate of inflation cooled slightly, but output price inflation in Scotland remained faster than at the UK level.

Mr MacRae said the six-month high in the index was testament to "robust growth" in the private sector. He went on: "Employment and new business both expanded in the month across manufacturing and services but the level of manufacturing new export orders fell, illustrating the challenges for exporters from a strong pound and weak growth in the eurozone economies."