SCOTTISH oil and gas services businesses have seen a “startling” turnaround in optimism and prospects, a key survey shows, boosting hopes that they are emerging from a long and painful downturn.

The survey, published today by Scottish Chambers of Commerce, also shows a strong performance by the manufacturing sector north of the Border in the opening three months of this year.

However, with retail and tourism struggling and much of services sector activity appearing subdued, Scottish Chambers said it was “too close to call” whether or not the economy north of the Border will turn out to have fallen into recession in the first quarter. Official first-quarter gross domestic product (GDP) figures for Scotland are due to be published in the summer.

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Figures this month from the Scottish Government showed the economy contracted by 0.2 per cent in the fourth quarter of 2016. A further drop in Scottish GDP in the opening three months of this year would constitute technical recession, unless the fourth-quarter numbers are revised to show a flat or positive position.

Scottish Chambers, highlighting pressure on households around the UK from surging inflation and subdued pay growth, reiterated its suggestion that value-added tax (VAT) could be cut temporarily to bolster demand. Its survey, conducted with the University of Strathclyde’s Fraser of Allander Institute, shows intense inflationary pressures amid sterling weakness following the Brexit vote.

The survey found that 35.2 per cent of Scottish oil and gas services firms were more optimistic in the first quarter than they had been in the preceding three months, and only 14.8 per cent were less hopeful. The resultant 20.4 per cent balance experiencing a rise in optimism contrasted with a net 17.7 per cent reporting a decline in the preceding three months. In the first quarter of 2016, a net 47.3 per cent of Scottish oil and gas services businesses reported a fall in optimism.

Garry Clark, head of Scottish Chambers’ economic development intelligence unit, described the turnaround in optimism in the Aberdeen-focused oil and gas services sector as “startling”, while noting the improvement was from a “low base”.

A balance of 1.9 per cent of oil and gas services companies in Scotland reported a fall in sales in the first quarter. However, this signalled a far less steep decline than the net 68.9 per cent posting a drop in sales in the first quarter of 2016. And a net 31.5 per cent of Scottish oil and gas services firms forecast a rise in sales over the current quarter. In the first quarter of 2016, a balance of 35.1 per cent had projected a decline in sales on a three-month view.

Referring to the turnaround in the survey readings for the oil and gas services sector, Mr Clark said: “Obviously, it is big numbers. It bears out what we have been saying for a couple of quarters. It seems to be bottoming out, and now looks like it might be improving. There is good evidence of that.”

He added: “The numbers there look spectacularly better than they were a year ago. That has got to be good in terms of that part of the economy beginning to show signs of picking up.”

However, he observed that, with this rebound likely driving more positive overall readings for the business and financial services category, other parts of this sector might be “reasonably flat”.

A net 13 per cent of Scottish manufacturers reported a rise in sales revenues in the latest quarter, with a balance of 24 per cent posting an increase in exports amid sterling weakness.

Mr Clark said: “We are quite happy with the position of manufacturing.”

However, a net 20 per cent of firms in the retail and wholesale sector reported a fall in sales revenues. And a balance of 13 per cent of tourism businesses posted a decline in sales revenues.

In retail and wholesale, 67.5 per cent of businesses expect to raise prices over the next three months, the highest figure since the third quarter of 2011 when annual UK consumer prices index inflation hit 5.2 per cent.

Mr Clark said: “There are very, very strong expectations of price rises. That is why we are saying maybe we need to get back into that VAT scenario to try and encourage consumer demand.

“If price rises are going to become a factor in the next couple of years, particularly if they are going to outstrip pay rises, that is a concern in terms of how far consumer demand can drive the economy.”

Commenting on this week’s announcement of a snap General Election and the possibility of a second independence referendum, Mr Clark said: “We have been through a period of time where we have been through two referendums, two elections. We are about to have another election and potentially another referendum as well. All of that adds to cumulative uncertainty.”