The recovery in the Scottish economy is expected to slow at the end of Q3, after hitting a peak in July, according to the Bank of Scotland Index of Leading Indicators.

The latest data points to a slowdown in economic growth in the final quarter of 2010, the bank says.

A key driver of economic growth remains low interbank lending rates which, despite creeping up in recent months, remain at historically low levels, and will help incentivise investment. New order levels are also rising, which continues to increase capacity pressures, notably in the manufacturing sector. This is borne out in firms demand for staff, which has improved in each of the past eight months.

However, the latest data flow highlights looming headwinds facing the recovery. Historically low interest rates are yet to stimulate new housebuilding activity and consumers remain markedly pessimistic with regards to current economic conditions. Inevitably, consumers are reluctant to purchase big ticket items, highlighted by declining new car sales in June and July. Weakening business sentiment is also dampening the outlook for the economic recovery over the remainder of the year.

Donald MacRae, chief economist at Bank of Scotland, said: “The Scottish economy emerged from recession at the end of 2009 but growth then stalled in the first three months of this year. The Bank of Scotland PMI showed that the Scottish private sector has been growing for thirteen successive months