A decline in Scottish business activity has accelerated with few signs of a bounce back and expectations that firms will trim their payrolls, according to new data.

Figures for January from Royal Bank of Scotland showed output from the manufacturing and services sectors fell from December’s five-month high, signalling a quickened contraction in private sector activity.

The rising cost of living, supply chain disruptions and a slowdown in the housing market all contributed towards the latest downturn.

Service firms led the decline, registering faster rates of reduction in both business activity and new orders compared to their manufacturing counterparts.

Of the 12 UK regions monitored by the Royal Bank of Scotland Business Activity Index Scotland registered the sharpest pace of contraction in incoming new business.

Despite the difficult start to the year and the prospect of recession for much of this year, businesses were more optimistic for the longer term.

The future activity category, which asks businesses to rate their prospects for growth over the next 12 months, reached its highest level in six months. This was driven by the possibility of new projects and increasing activity.

Judith Cruickshank, chairwoman of the bank’s Scotland board, commented: “The start of the year revealed that the downturn in Scottish private sector activity that began last August was extended into 2023.

“Moreover, the latest decline in private sector activity accelerated. It seems unlikely that the sector will bounce back anytime soon as services firms were severely impacted by the depressed demand conditions and the current economic climate.

“The step back in client activity has also resulted in firms trimming their workforce numbers for the second month running. Alongside an ongoing drop in the level of unfinished work, a further reduction in payroll numbers can be expected.

“However, the latest figures indicate that perhaps the worst of inflation has passed. Nonetheless, the current rates of input price and output charge inflation are still elevated and can be detrimental to the health of the Scottish private sector.”

Economists remain divided over prospects for this year. The Bank of England, last week, predicted that the UK economy would shrink in each of the four quarters this year.

But the National Institute of Economic and Social Research (NIESR) said it expects the UK to avoid a protracted recession this year.

According to the Office for National Statistics Britain narrowly avoided a recession last year.