The Scottish private sector is experiencing some of the worst conditions ever recorded by the Royal Bank of Scotland�s purchasing managers� index

The Scottish private sector is experiencing some of the worst conditions ever recorded by the Royal Bank of Scotland's purchasing managers' index with service companies particularly hard hit.

Figures published by the bank today provide a gloomy picture with output in June contracting at the fastest rate in the survey's 10-and-a-half year history. It fell throughout the second quarter of the year in both the manufacturing and service sectors with the latter particularly badly hit.

The contraction in output came despite a drop in backlogs as new orders also declined at a record pace. June was the fourth consecutive month that new business received by Scottish private sector firms contracted with the decline in Scotland sharper than the UK average.

Inflation is also squeezing companies, with input prices also rising at a record pace, accelerating for the fourth successive month.

Royal Bank said that record oil prices underpinned the latest rise in inflation, feeding through to fuel and related commodities. It said that energy, utilities, food and steel were all highlighted as key sources of rising prices in June.

Firms are passing some of these extra costs in upping their prices with a weaker rise in service sector companies' output charges compared to May offset by a record increase in manufacturer's charges.

The sharpest rise in output prices was from business services while the weakest increase was found in travel, tourism and leisure.

The result has been job losses. The rate of job shedding is the fastest recorded since March 2003 but losses were concentrated in the service sector as manufacturers actually slightly increased their workforces. Job shedding was particularly strong in the travel, tourism and leisure sector. But the contraction in staffing levels in Scotland was milder than that experienced in most of the UK.

Royal Bank head of microeconomics David Fenton said: "Scotland's private sector economy lost further momentum in June, with the service sector hit harder than most.

"Activity also contracted in the manufacturing sector, though the rate of decline was less pronounced and the modest increase in new orders suggests that conditions might improve in the months ahead."

The trends seen in Scotland were broadly replicated across the UK, although Royal Bank head of group economics Stuart Porteous said that the south-east of England remained the only part of the country still expanding. There are only modest declines in the north of England.

Overall business activity in the UK declined at its fastest rate since December 1998. The strongest falls in activity were experienced in Northern Ireland while Wales had the sharpest fall in staffing levels.

Companies attributed job losses to a lack of new business, rising levels of spare capacity and increased cost pressures.

Porteous added: "With employment contracting in 11 of the 12 regions and margins under pressure, both households and firms are having a decidedly chilly summer."

This downbeat picture was supported by a survey of 3624 people by the Association of British Insurers yesterday showing that 92% think the economic environment is worse now than it was a year ago and 82% expecting it to worsen in the coming 12 months.

Rebecca Driver, the ABI's chief economist, said: "Confidence in the economy is deteriorating rapidly: 61% of people now think the economy is a lot worse than a year ago, compared to 49% in April.

"Only 5% expect the situation to improve in the next year. But people are less pessimistic about their own circumstances - while 9% feel a lot more concerned about the prospects of losing their job than they were three months ago, 13% actually feel a lot less concerned."