Service sector figures raise hopes of avoiding triple dip

Services, which account for more than three-quarters of the UK economy, returned to growth in January despite heavy snowfall, according to the closely-watched Market/CIPS purchasing managers’ index (PMI).

Service activity rose to 51.5, above the 50 mark which separates contraction from growth. It confounded economists’ expectations for a 49.5 reading.

January’s growth followed December’s first fall in activity in two years, and was matched with an eight-month high in business confidence.

A recovery in services is seen as pivotal if Britain is to avoid plunging back into recession, after the economy contracted by 0.3 per cent in the final quarter of 2012.

“The three-month moving averages for January point to an expansion in activity and suggest that the UK will escape a triple-dip recession after the fourth quarter’s 0.3 per cent fall in output,” said Yorkshire Bank economist Tom Vosa.

“New business and stronger demand for services reportedly were behind the increase and with the employment index reaching its highest level since July and expectations reaching their highest level since May we suspect that we should be seeing a further improvement in the index over the course of the first quarter.”

The service sector, which spans industries including law, financial services, communication, retail, leisure, hotels and transport, reported higher volumes of incoming new business.

Markit said growth in staff numbers was the sharpest for six months as companies recruited to keep up with demand.

“A huge sigh of relief accompanies these numbers, as a return to growth of the service sector in January greatly reduces the likelihood of the UK falling back into a ‘triple-dip’ recession,” said Markit chief economist Chris Williamson.

“Companies reported the strongest rise in services activity for four months, building on the promising news from manufacturers last week, where output was reported to have grown at the fastest rate for 16 months in January.

“Stronger growth would inevitably have been recorded had the country not suffered the heavy snowfall, suggesting the underlying trend is even stronger than these numbers indicate.”

However, margins continue to be squeezed as input costs rose faster than output prices – hitting a nine-month high in January, driven by soaring energy, fuel and food bills.

Competition was hampering firms’ abilities to put up prices, Markit added.

Higher capacity also led to a fall in order backlogs, with a modest decline in work outstanding – the fourth in successive months.