UK manufacturing is on the brink of recession, amid further worrying signals of deterioration of the private sector economy in Scotland.

UK manufacturing is on the brink of recession, amid further worrying signals of deterioration of the private sector economy in Scotland.

The outlook for the UK manufacturing sector has worsened dramatically, with expectations for activity, profits, employment and investment all down sharply since the beginning of the year, according to the twice-yearly KPMG business outlook survey.

The survey covering 3700 companies in 11 European countries found, worryingly for the government, that only in Spain and Ireland are businesses now more pessimistic about economic conditions.

Andrew Smith, chief economist at KPMG, said: "UK manufacturing is staring recession in the face." He said the degree of change in sentiment in six month was "startling", adding: "The survey points to a bleak outlook for manufacturing output, employment and company profits, confounding hopes that the weak pound would give the sector a boost."

The Confederation of British Industry will sound a further alarm bell this week when it admits to having been "consistently over-optimistic" in its previous prognosis for the economy.

Scotland's claim to enjoy any immunity from the slowdown is further challenged today in the latest purchasing managers index survey from the Royal Bank of Scotland, the most regular indicator of the health of the private sector economy.

Business activity in both manufacturing and services fell in July to its lowest level in the 10 years since the launch of the survey, produced for the Royal Bank by Markit Economics.

Output, new orders and backlogs all declined at survey-record rates, with services falling faster than manufacturing, while employment contracted at the second-fastest pace in survey history.

The index of seasonally-adjusted incoming new business slid to a new low of 39.8 in July, indicating the fastest decline in new contracts at Scottish service providers in the survey history. Moreover, Scotland registered a sharper rate of contraction than all other UK regions covered by the survey.

The speed of the fall "strongly suggests that the current sequence of falling output will not be arrested during the third quarter", the survey says. "The latest anecdotal evidence linked worsening new order volumes to poor economic sentiment surrounding the financial and property markets."

Private sector firms in Scotland cut staffing levels on average for the fourth month running in July, and worryingly the rate of job shedding picked up to a pace close to the survey record set in October 1998. Service providers cut staff at a faster rate than manufacturers, which posted the first overall decline in employment since May 2007.

Inflation of both input and output prices hit new 10-year highs. The rising cost of fuel and raw materials continued to weigh on firms in July, driven by high oil and metals prices, with manufacturers worse hit than service providers.

Output price inflation followed the trend, and manufacturers raised their prices at a stronger rate.

David Fenton, the bank's head of microeconomics, commented: "It will be of small consolation to Scottish businesses, but the slowdown has been less marked than in the rest of the UK.

"More encouragingly, the recent decline in oil prices should ease the upward pressure on companies' input costs."

The KPMG survey found 46% of panellists still forecasting some growth, but 27% now expecting contraction, the positive balance of 19% contrasting starkly with 59% a year ago.

Smith said: "Unfortunately, there is little prospect of relief from lower interest rates at home. Manufacturers still intend to pass on burgeoning input costs, which will keep the (Bank of England) Monetary Policy Committee on inflation alert."

This week the Consumer Prices Index, at 3.8% in June, is forecast to break through the 4% barrier - twice the government's target and its highest level since May 1992.

Ross Walker, economist at Royal Bank of Scotland, said: "We are forecasting the annual rate to have risen by half a point to 4.3% in the year to July. That is a big jump and it leaves the rate uncomfortably high. It is still food and fuel pushing up prices."

The Bank of England will also publish its quarterly inflation report on Wednesday, giving its detailed thinking on the sharp rise in the cost of living.

The same day the latest employment figures, likely to show unemployment heading back towards one million, will add to the gloom.

As recently as June, Richard Lambert, the CBI's director-general, warned against talking ourselves into recession. But in a letter to mark the first anniversary of the credit crunch, he writes to members: "There is no doubt that the mood has darkened in the last two or three months."

Lambert criticises "years of unsustainable increases in government spending", which have "left the public finances in poor shape to cushion the economy against these adverse shocks".