New figures show a substantial increase in the proportion of Scottish companies seeing a fall in turnover, with the service sector particularly hard hit.

The latest Lloyds TSB Scotland Business Monitor describes the economy north of the border as "grinding to a halt" in the last quarter, with 39% of firms seeing turnover fall and 32% seeing turnover unchanged.

With 29% of firms reporting rising turnover this gives a net balance of -10%, markedly below the +11% recorded three months ago and the +28% recorded a year ago.

"Scottish economic growth has slowed from the latest annual underlying rate of 2.1 ," said Professor Donald MacRae, chief economist of Lloyds TSB Scotland.

"Consumer confidence remains at a level sufficient to produce retail sales increasing at an annual rate of 6.6%. Claimant unemployment at 2.8% remains low. House price increases in Scotland have avoided a major price fall so far although sales and purchases have fallen significantly."

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Expectations for future economic growth have also crashed, with a balance of -28% of firms expected rising turnover in the next half year.

"The Business Monitor shows the Scottish economy feeling the effects of the credit crunch with slowing output, increasing costs and falling expectations to produce the most pessimistic assessment of future prospects in 10¾ years. After above trend growth in 2007, the Scottish economy is facing reduced growth in 2008," he noted.

In response to the report, Conservative finance spokesperson Derek Brownlee said the bleak picture showed why cutting business rates for small companies is so important, and also why households need immediate assistance.

"The Scottish Conservatives will continue to press our fully costed plan for every one of Scotland's two million households who pay council tax to get a cut of £150, and our pensioners to get even more with their bills cut in half.

"There are measures which we can take here, but there are bigger forces at work, and Scotland is not immune from the legacy of Gordon Brown and his failure to save for a rainy day. He has given us a broken economy.

"Gordon Brown promised an end to boom and bust. He was half right and we are all now paying the price as the credit crunch bites hard," he argued.

(GK/JM)