Scotland’s economic recovery is set to peak in Q3, according to the latest Bank of Scotland Index of Leading Indicators.

The indicator subsequently points to a slowing of economic growth in Q4, continuing into the start of 2011.

Bank of Scotland says a major factor in subduing growth prospects is weak consumer confidence, as highlighted by both survey-based indicators and shoppers’ reluctance to purchase big ticket items. New car registrations fell at the fastest pace since early 2009 in October.

In contrast to the trends seen in the consumer sector, latest data from the CBI indicate that business confidence is growing North of the border. This, however, has not fed through to firms’ employment intentions, as demand for permanent workers remains subdued. Pressure on Scottish manufacturers’ current output levels also remains to the downside, as inventories of finished products have accumulated faster than orders have been received in recent months.

Despite weak consumer confidence and lacklustre demand for staff, a number of factors are likely to support growth in the Scottish economy. Interbank lending rates remain historically low (hovering around 0.75%), while latest official data pointed to a year-on-year rise in new housing starts for the first time since 2005.

Donald MacRae, chief economist at Bank of Scotland, said: “The recovery of the Scottish economy looks set to peak this autumn with the slowdown extending into the first quarter of next year. Low levels of consumer confidence are driving moderate increases in retail sales whilst employers’ appetite for creating permanent jobs remains muted. Manufacturing and construction are leading the subdued recovery. Low growth rather than no growth seems the most likely prospect for the Scottish economy in early 2011.”””