Scotland's dominant service sector slammed into reverse during the summer as firms suffered precipitous falls in turnover and business volumes and predicted even worse to come, dragging the overall economy down.

Scotland's dominant service sector slammed into reverse during the summer as firms suffered precipitous falls in turnover and business volumes and predicted even worse to come, dragging the overall economy down, a key survey shows today.

Lloyds TSB's latest quarterly business monitor for Scotland points to the sharpest deterioration in economic conditions north of the border since this survey began nearly 11 years ago, as the global credit crunch bites.

Forty-four per cent of companies in the service sector in Scotland reported a fall in turnover during the three months to August, with only 24% enjoying a rise and the remaining 32% reporting a flat position.

The resultant net 20% of service companies reporting a drop in turnover contrasted starkly with a balance of 6% posting a rise in the previous quarterly survey, and was the worst outturn in the history of the monitor, conducted by Strathclyde University's Fraser of Allander Institute. In summer 2007, a net 29% of Scottish service firms were reporting rising turnover.

Looking forward, 52% of Scottish service companies which responded to the survey feared a fall in turnover during the six months to February next year and only 18% expected a rise. The net 34% expecting a fall is much worse than the balance of 2% which projected a fall in turnover over the six months to November this year in the previous quarterly survey.

Although production businesses fared better than their counterparts in services in the three months to August, with 37% of them enjoying a rise in turnover and only 31% suffering a fall, this sector is forecasting a plunge in sales in the six months to February.

Forty per cent of Scottish production firms predict a fall in turnover during this six-month period, with only 20% forecasting a rise.

And, taking services and production together, a net 10% of Scottish firms suffered a fall in turnover during the three months to August with 39% reporting a drop and only 29% experiencing a rise.

Forty-seven per cent of companies predicted a drop in turnover during the six months to February next year, and only 19% forecast a rise.

The picture on business volumes was even worse than that for turnover.

Only 16% of service companies enjoyed a rise in volumes during the three months to August, with 49% suffering a drop.

Fifty-three per cent of service firms projected a fall in volumes during the six months to February next year, with only 11% expecting a rise.

Fifty-seven per cent of all firms surveyed viewed weakening demand as a "very important" factor when considering market conditions during the next three months, with the figure being 58% in production and 56% in services.

The survey shows concerns over credit availability have risen, among both service and production businesses, to the highest level ever recorded by the monitor.

Both service and production firms expect the cost of credit to increase.

Professor Donald MacRae, chief economist at Lloyds TSB Scotland, said: "The latest Business Monitor shows growth in the Scottish economy grinding to a halt in summer of 2008."

He added: "Concerns over the importance of weakening demand have risen to levels not seen since 10 years ago This Business Monitor shows the Scottish economy feeling the effects of the credit crunch with slowing output, increasing costs and falling expectations to produce the most pessimistic assessment of future prospects in 10-and-three-quarter years (since the monitor started).

"After above-trend growth (of 2.2%) in 2007, the economy is facing reduced growth over 2008."