Scottish private sector business activity expanded at its weakest pace since the beginning of 2005, signalling a hefty deceleration of the economy north of the border, an influential report revealed today.

Scottish private sector business activity expanded at its weakest pace since the beginning of 2005, signalling a hefty deceleration of the economy north of the border, an influential report revealed today.

The latest Purchasing Managers' Index from Royal Bank of Scotland said the hard-pressed Scottish manufacturing sector was the main culprit in the October slowdown, and that the volume of new orders barely rose at all, compared with robust growth throughout the rest of the year.

Anecdotal evidence has suggested that "concerns surrounding a wider economic slowdown were prevalent - including the effects of high interest rates, instability in the financial markets and a potential slowdown in the housing sector".

The latest PMI noted that the decline in outstanding business among Scottish manufacturers was the most severe since January 2005.

Nonetheless, this apparent slowdown comes on the heels of a period of robust economic growth. According to recent data from the Scottish Government, the economy north of the border expanded faster than the UK as a whole in the second quarter of the year. The red-hot 0.9% growth in the three months to the end of June marked the fastest quarterly expansion in Scotland since 2003, and beat an advance of 0.8% UK-wide.

However, on an annual basis to the end of June, Scottish growth of 2.3% trailed UK-wide expansion of 3.1%.

Adding insult to injury, the rate of workforce growth in the Scottish private sector economy weakened for the fourth consecutive month in October.

According to the latest PMI, both manufacturers and service providers posted modest gains in staffing levels, while a marginal decline in employment was also indicated in the so-called "new economy", which encompasses technology, media and telecommunications.

At the same time, the service sector - led by business and financial services - registered a slightly sharper rate of activity growth, but it was still below trend.

Royal Bank senior economist David Fenton said: "Growth in Scotland's service sector picked up but this was more than offset by a deceleration in manufacturing."

Scotland's manufacturing sector was marred last month by torpid demand at home and overseas, the Royal Bank's latest PMI showed. Indeed, the European and US manufacturing slowdown continued in October, although Russia posted a slight improvement in growth.

The Eurozone Manufacturing PMI declined in October, posting its largest decline for almost three years and signalling the weakest monthly expansion since August 2005 - a weakening led by Germany, where the PMI showed the largest points fall in the 11-year history of the survey. Italy also recorded weaker growth, while expansion was unchanged on a month ago in France.

Meanwhile, UK manufacturing growth eased further in October, to the weakest for 10 months.

The Royal Bank survey also noted that work backlogs among Scottish companies fell at their fastest pace since the start of the year.

The survey report said: "The volume of incoming new business in the Scottish private sector economy rose at the slowest pace in the current 52-month period of expansion in October.

"This primarily reflected a steep slowdown in the manufacturing sector, where new orders barely rose since September - heavily reflective of a decline in new export orders.

"Service sector new business increased at a slightly sharper pace than in September, but one that remained weak compared to recent rates."

Meanwhile, a slight rise in input price inflation was registered last month.

Average input prices rose sharply in October, and at a slightly steeper rate than in September. The rate of input cost inflation remained above the survey's long-run average, as it has throughout 2007 so far. Fuel, wages, food prices and paper were all reported as key sources of cost inflation during the month.

As a result of further sharp increases in cost burdens, output prices charged by Scottish private sector firms increased at the fastest rate for six months in October.

"Both manufacturers and service providers increased charges at stronger rates than in September," the survey said.

On the basis of research involving 600 companies north of the border, Royal Bank's PMI showed that Scotland remained at fifth place in the rankings of 12 UK areas, in spite of the slowdown.

l Separately, demand for goods from small and medium-sized manufacturers across the UK has flattened after nine months of solid growth, and firms have become more pessimistic about the business environment, the CBI's latest quarterly SME survey revealed today.

The experiences of SMEs differed over the last quarter however. Medium-sized manufacturers hit a 12-year high in export orders growth while reporting a moderate decrease in domestic orders. Meanwhile, small firms saw slight growth in domestic orders and stable export orders.