The Royal Bank of Scotland‘s Business Activity Index, a monthly index measuring the change in output for Scotland’s manufacturing and service sectors between each, scored 55.2 in May, an increase of 1.4 from April, indicating an expansion in private sector activity for the fifth month in a row.

This is the strongest pace of growth in two years, with data showing it was largely achieved riding the tails of improving demand for services, which masked a downturn seen in demand for manufacturing.

However, job growth and backlog accumulation was only found in service firms as a result of the downturn in manufacturing.

After picking up significantly in April, price pressures also eased in May.

The Bank also observed an increase of inflows of new work, which supported the growth in activity. This was the fourth successive month Scottish Businesses registered a rise in inflows in new work.

The index, which is seasonally adjusted, saw a three-month high in new work, which was broadly in line with the rest of the UK.

Service firms were the centre of this increase, where a faster intake of new businesses offset the continuous downturn at manufacturers to stabilise overall growth.

Better marketing strategies, new client wins, and increased customer activity helped support the latest growth, according to surveyed service providers.

Business confidence is also up: Scottish businesses are optimistic about growth in the coming year, and cite plans for digitalisation and marketing improvements, as well as improving demand conditions.

This confidence however, as mainly driven by the service sector, as manufacturers grappled with their downturn.

Even with the overall uptick, Scottish firms were the least optimistic out of the 12 UK regions surveyed for the second month in a row.

Still, the report revealed more positives for Scotland.

Job creation accelerated, with hiring activity the strongest in three months, owing wholly to the increase in service sector where expansion drove recruitment and employment.

Of the 12 monitored nations and regions, Scotland only feel behind Northern Ireland and the West of England when it came to stronger increases in employment levels.

Pressures on capacity in the service sector, after their marked growth, has resulted in a fractional increase in order backlogs across Scotland after a year of continual decline.

While manufacturers rapidly depleted their backlogs, the service sector linked the uptick to additional business from new and existing clients.

London was the only region outside of Scotland that reported a rise in the level of outstanding business.

Cost burdens remained intense – input prices rose sharply in May, with anecdotal evidence pointing to rising labour, fuel, and raw material costs.

Despite this, inflation eased after April’s high. Input price inflation in Scotland was stronger than the rest of the UK for the first time in four months this May.

Average prices rose in May across Scotland as well, largely driven by increasing cost burdens. Output charges also rose steadily in May, in line with the rate of increase in input prices.

The rate of inflation was at its second-slowest speed in over three years, and was weaker than the UK average.

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Judith Cruickshank, chair of the Scotland board at RBS, commented: “The Scottish private sector exhibited further gains midway through the second quarter – the upturn was contingent on the sustained rise in services activity which rose at a sharp and quicker rate and was vital in offsetting the shortfalls seen at manufacturers.

“Moreover, the divergence between the two sectors is set to persist as manufacturing new orders fell rapidly, while demand trends improved for services.

“May data also signalled a faster rate of job creation and a fresh rise in outstanding business, but these upturns were again fuelled by the service sector.

“While the service sector looks set to expand in the coming months as expectations for future activity strengthens, the manufacturing sector will only hold back growth momentum, unless demand for goods picks up.”