SCOTLAND’S private sector economy expanded at its fastest pace for nearly four years as growth in the service and manufacturing sectors accelerated in June.

However, companies faced rising labour costs as workforces were expanded to deal with higher workloads, with backlogs of work accumulated for the first time in three and a half years, a key economic survey has found.

The Royal Bank of Scotland (RBS) Purchasing Managers’ Index, which measures the combined output of the manufacturing and services sectors, increased to 54.5 in June, up from 53.7 in May. It meant the pace of expansion accelerated for a third month in a row, according to the report, with the June reading the highest in 46 months.

A reading of 50 separates expansion from contraction on the index, which is based on a survey of around 500 manufacturers and service providers.

The June survey saw panellists link the upturn in business activity to growing demand. New business was found to have grown solidly in June, with the pace of growth stepping up to a 47-month high amid increased orders from new and existing customers. However, growth in business activity lagged the UK for the first time since March.

The survey found rising demand led employers to take on staff to boost output capacity, resulting in employment expanding to the greatest degree in 52 months. Job creation in Scotland noticeably outstripped the level for the UK as a whole.

However, increased labour costs had the effect of intensifying cost pressures. Input prices were found by the survey to have increased at their sharpest rate in 18 months, signalling an erosion of margins across the private sector.

Selling charges were found to have increased for a 23rd successive month in June, with inflation broad-based across the services and goods-producing sectors. Price inflation dipped to a five-month low, however, with some panellists citing increasing competition.

Malcolm Buchanan, chairman of the Scotland board at RBS, said: “Private sector output growth continued to gather momentum as the second quarter ended, with the pace of expansion quickening for the third straight survey to reach a 46-month high.

“Indeed, operating conditions remain robust, with strong new order inflows encouraging businesses to hire extra staff to the greatest extent in almost four and a half years. At the same time, panellists indicated that higher employment had contributed to another sharp month of cost inflation, adding strain to profit margins.”

Meanwhile, the latest quarterly economic survey from British Chambers of Commerce (BCC), published today, found that economic conditions remain sluggish in the UK, despite a modest improvement o activity in the second quarter.

Amid ongoing Brexit uncertainty, the survey found tough trading conditions in the dominant service sector. The balance of firms reporting increased domestic sales rose from +20 to +23, with the balance reporting increases in export sales rising to +15 from +13. The balance reporting improved export orders rose +12 from +10.

However, the balance of service firms expecting to increase turnover in the next year edged down to +40 from +42. In addition, the balance of those confident that profitability will improve over the next year dipped to +29 from +33.

While the survey signalled that the balance of manufacturing firms reporting improved sales rose in the quarter, and that the balance reporting improved orders increased to its highest level since the first quarter of 2015, BCC said the size of the sector means its contribution to UK growth remains limited.