The Scottish economy recorded growth in July for the first time since March last year - the latest Purchasing Managers' Index report reveals today - bringing to an end the longest and deepest period of contraction in this survey's 11-and-a-half-year history.

This return to expansion territory in Scotland, which comes two months after the UK's resumption of growth on comparable surveys if not on official data, was driven by the dominant services sector. Manufacturers recorded marginal contraction in production last month.

The headline business activity index for Scotland's private sector rose from 49.6 in June to 52.1 in July on a seasonally-adjusted basis. This took it back above the level of 50 which separates expansion from contraction for the first time since March 2008.

The forward-looking indicator of new orders showed a marginal increase during July, although the rise was weak in a UK-wide context. The ongoing decline in employment slowed to its weakest pace for 11 months, and was significantly less sharp than that in the UK as a whole. But July was nevertheless the 16th consecutive month in which the private sector workforce has shrunk north of the border - underlining the human misery of the deep recession.

Companies' backlogs of work declined at the slowest pace for 16 months - a positive sign.

The latest monthly PMI report for Scotland chimes with positive economic surveys for the manufacturing and service sectors in the UK as a whole which were published last week.

However, serious doubts remain over the sustainability of any emerging recovery, with bank lending to private non-financial corporations in the UK having tumbled by £14.7bn during the second quarter.

The Bank of England last week underlined the huge economic challenges ahead by hiking the amount by which it is boosting the UK money supply by £50bn to £175bn, in a fresh attempt to kick-start a sustainable recovery.

The scale of the move on this quantitative easing programme by the bank's Monetary Policy Committee took the City by surprise. The nine-strong MPC highlighted the continuing fall in lending to businesses, and observed that interest-rate spreads on loans "remain elevated".

Restoration of normal lending patterns is viewed as vital to ensuring any economic recovery does not peter out almost as soon as it begins.

Although a raft of official data and surveys signal the UK may be close to emerging from the deep recession triggered by the global credit crisis, the latest £50bn boost to the quantitative easing programme suggests a view on the MPC that the economy is far from out of the woods.

All eyes will be on the Bank of England's latest projections for UK gross domestic product and inflation when it publishes its latest quarterly inflation report on Wednesday.

Andrew Self, economist at PMI survey sponsor and financial information company Markit, believed the improvement in the Scottish economy in July put it on the road to recovery but highlighted the challenges ahead.

He said: "Two months after the UK as a whole, the Scottish economy returned to growth during July, bringing to an end a period of economic contraction that has been unprecedented in terms of both duration and magnitude. While this release finally puts Scotland on a path towards outright recovery, the trajectory, strength and longevity remain uncertain.

"Output and new orders in the manufacturing sector continue to fall and overall new business in Scotland rose at the weakest pace of all areas of the UK except Northern Ireland. Weak demand and falling employment look set to weigh on growth prospects north of the border."

Anecdotal evidence from the survey panel suggested the improvement in demand for Scottish goods and services during July was enabled by signs that the wider UK economy is starting to emerge from recession.

However, in spite of the return to growth in the Scottish private sector economy in July, panel members reported that current workloads remained insufficient to maintain existing workforce numbers, signalling a continuation of job-shedding in coming months.

Higher oil and transportation costs resulted in another rise in Scottish companies' average input prices during July. The rise in costs was a second consecutive monthly acceleration in the rate of input price inflation.