Scotland was the only nation in the UK outside of Northern Ireland to record payroll growth in July with employment rising at its fastest rate since September 2024 - reaching a nearly two-year high.

The report found that job growth was driven almost entirely by service providers, who cited preparations for future projects, while goods producers saw a marked decline in payrolls.

But many businesses reported operating expenses remained high, driven by payroll overhead growing significantly. At the same time, companies faced 22 consecutive months of falling new orders and weak client demand.

Output charge inflation slowed for the third straight month to its lowest since February, giving Scotland the weakest pricing power anywhere in the UK. Due to an increase in customer reluctance to spend, many companies are being forced to absorb the higher labour costs internally rather than passing them on.

The headline Royal Bank of Scotland Business Activity Index – a seasonally adjusted index that measures the month-on-month change in the combined output of Scotland’s manufacturing and service sectors – slipped from 47.6 in June to 47.3 in July. This signalled a further decline in Scottish private sector activity, extending the current run of contraction to four months. Companies reporting lower activity linked this to weaker economic conditions, geopolitical uncertainty and a lack of new orders.

After rising slightly for the first time in three months in June, employment at Scottish private sector companies rose again in July. Furthermore, the pace of job creation increased to its fastest since September 2024. Sector data indicated that the upturn was driven by service providers, as a marked decline in payrolls was seen among goods producers. Services firms often linked staff hiring to expectations of new projects.

Judith Cruickshank, Scotland board chair at Royal Bank of Scotland, said: “Scottish firms signalled a mixed start to the second half of the year according to our Royal Bank Growth Tracker data. Activity continued to decline, reflecting subdued demand and a sharp fall in new orders.

“However, business optimism continued to strengthen from April’s recent low. At the same time, firms expanded payrolls, with employment rising at the fastest rate for nearly two years. Inflationary pressures also eased, reducing potential headwinds to demand.

“Overall, while Scotland lagged behind the wider UK picture in terms of falling business activity and lower confidence, it stood out for the resilience of its labour market. As we continue into the second half of 2026, we may see this increased hiring translate into increasing business activity if inflation continues to fall.”