The construction industry fared better in the first quarter

The Scottish Chambers of Commerce (SCC) business survey forecast said these sectors should also continue to improve for the remainder of 2004.

The report was compiled by the Fraser of Allander Institute.

It called on the executive and the UK Government not to change fiscal policy to ensure business confidence remained.

Improved performance

Speaking at the launch of the report in Glasgow, Bob Leitch, director of SCC, said: "This is the third survey in a row which has shown a positive and upward trend in the Scottish economy and it is encouraging that it also anticipates further growth for the rest of the year.

"In addition to the upturn in the tourism, manufacturing and construction sectors, retail is also showing signs of improved performance after a quieter than expected period leading up to Christmas."

Tourism is going to be the fastest growing part of the economy

Mr Leitch added that it was vital to encourage and support smaller manufacturing firms to explore opportunities in new overseas markets, particularly in the Far East, China and the new EU member states.

He called on the executive not to impose further burdens on Scottish business.

The number of tourists visiting Scotland in the first three months of the year was the highest in six years, according to the report.

Mr Leitch said: "We believe that tourism is going to be the fastest growing employment sector of the economy over the next five to 10 years.

"We think that at last Scottish tourism is starting to get its act together and we think the future is very bright."

The survey was compiled from questionnaires completed by 450 firms in March.