SCOTLAND'S economy is continuing to expand and the recent woes affecting the hardhit manufacturing sector are beginning to ease, according to the latest bi-annual economic report from the Scottish Executive.

The report, which provides a summary of trends in the Scottish, UK and global economies, showed that the gross value added index for Scotland expanded by 0.9-per cent in the most recent quarter and 1.8-per cent over a year.

Relative to the UK as a whole, Scotland's quarterly performance was strong, with the UK growing by 0.5-per cent compared with Scotland's 0.9-per cent.

Driving the growth is the service sector which accounts for almost 70-per cent of total gross value added. Within the production sector, of which manufacturing accounts for 80-per cent, the downturn experienced since 2000 appears to be bottoming out.

Service sector output rose by 1.8-per cent in the four quarters to September 2004, and by 1.3-per cent over the quarter.

The production sector showed its first annual increase for more than four years in the 12 months to September last year, though there was a marginal decline in the final three months.

Meanwhile, the labour market has also performed well, with employment increasing to its highest level since records began in 1992.

The improvement follows radical changes between 1995 and 2003, including the decline of traditional manufacturing industries and agriculture.

However, this has been more than offset by the rise of the service sector which has become Scotland's main employer, including activities such as banking and insurance.

Despite the progress, the report warned that risks to economic growth remain. In the short term, oil prices continue to be highly volatile with the price per barrel remaining high, which is hitting profit margins in some sectors.