August was the first time in seven months business activity in Scotland failed to expand, according to a report.
The monthly purchase managers’ index (PMI) from the Royal Bank of Scotland shows private sector activity experienced no growth last month, marking the end of a six-month period of growth.
The Scotland Business Activity Index fell to 50.0 in August, down from 51.1 in July, indicating a stagnant period.
Meanwhile, new orders fell for the second consecutive month and at an accelerated pace as service providers joined their manufacturing firms in the downturn.
Companies still registered historically sharp increases in their cost burdens, the report said, and as a result costs for goods and services were also raised sharply.
Business confidence has also dropped to an eight-month low.
In a further blow to the sector, service providers posted a decline in orders, and in manufacturing, new orders have been falling for five consecutive months at a notable pace.
Analysts attribute this decline in new business to factors such as inflation, economic uncertainty, and the rising cost of living, all of which have put pressure on demand.
Despite this, businesses also reported an increase in employment for the seventh month in a row and predicted growth over the next year.
Judith Cruickshank, chairwoman of the Scotland board at RBS, said: “The latest PMI data for Scotland pointed to emerging weakness in the Scottish private sector, with firms signalling no change in private sector output and new orders contracting modestly amid reports of economic uncertainty and falling demand.
“Declining business requirements could result in a reduction in output unless the demand picture improves.
“Moreover, higher material, labour and energy costs meant that firms continued to struggle with rising cost burdens.
“In turn, companies raised their charges for the provision of goods and services. Lastly, business confidence around the year-ahead outlook remained historically subdued and weakened to an eight-month low, as frail demand conditions, higher interest rates and inflation all weighed on expectations.”