City economists said the robust performance, after strong figures from the manufacturing and construction industries earlier this week, showed the continuing resilience of the economy in the face of Brexit uncertainty.
The closely-watched Markit/Cips services purchasing managers’ index (PMI) rose to 56.2 in December, up from 55.2 in November. Any figure above 50 signifies growth.
However, the data also signalled that inflationary pressures in the services sector remained “substantial”, with input prices rising at the second fastest rate since April 2011.
Chris Williamson, chief business economist at IHS Markit, said: “A buoyant service sector adds to signs that the UK economy continues to defy widely-held expectations of a Brexit-driven slowdown.”
He said that collectively the PMI surveys this week pointed to GDP growing 0.5 per cent in the final quarter of 2016.
“At face value, this improvement suggests that the next move by the Bank of England is more likely to be a rate hike than a cut, but policymakers are clearly concerned about the extent to which Brexit-related uncertainty could slow growth this year,” Williamson added.
The Bank cut interest rates to a new historical low of 0.25 per cent in August following the UK’s EU membership referendum in June.
David Noble, chief executive at the Chartered Institute of Procurement & Supply (Cips), said “Exceeding all expectations, the year ended on a high for the service sector, which rounded off the strongest quarter in 2016 as new business and employment levels continued to grow.
“The overall rate of activity growth accelerated for the third successive month to the fastest since mid-2015. Keeping up with levels of new work and increased activity, additions to the workforce were maintained for the fifth month running.”
The dominant services sector ranges from banking, retail, hotels and restaurants to nightclubs, IT and transport.
The pound rose on the data, climbing to $1.23 compared with $1.50 just before the Brexit vote. However, the City consensus is that the economy will grow at only 1.3 per cent in 2017, down from 2 per cent last year, partly due to rising inflation and a lid on real earnings growth.
Dean Turner, UK economist at UBS Wealth Management, said the robust recent economic data had been supported by the weak pound. But he added: “As we move further into the year, our expectation is that these positive effects may begin to fade.
“Moreover, higher inflation is likely to erode household income growth which could dampen the up-to-now buoyant consumer.”