Service sector expands less than expected but ‘signs are hopeful’

Confidence about the year ahead among firms in the services sector hit its highest level in a year, with more than half of respondents showing optimism, while only one in ten was downbeat. Employment in the sector also ticked up.

The services sector purchasing managers’ index (PMI) compiled by Markit and the Chartered Institute of Purchase & Supply (Cips) fell to 53.8 from its ten-month high of 56 in January. The latest reading was below forecasts, but stayed well above the 50 mark that separates growth from contraction.

Combined with evidence of growth in manufacturing and construction in the first two months of the year, the survey eases fears that the UK will enter a recession, after the economy having shrank by 0.2 per cent in the final quarter of 2011.

Economists said the combined surveys pointed to economic growth of about 0.4 per cent in the first quarter of 2012.

Jeremy Cook, chief economist at foreign exchange company World First, said: “Although this figure is a miss on expectations, it should still be considered positive news for the UK. I think even the most ‘bearish’ of commentators will concede that a double-dip recession is now unlikely.”

But he said the latest survey did not eliminate fears of a “slow grind” recovery with little growth all year, with the possible oil price shocks now adding to concerns.

Daniel Solomon, economist at the Centre for Economics & Business Research, said the UK’s prospects of avoiding recession in 2012 depend largely on how the eurozone crisis develops.

He said there had been “encouraging noises” from German chancellor Angela Merkel on the size of the European bail-out fund, while Greece had managed to avoid a technical default.

But he added: “For all these hopeful signals, we’ve been here before. This latest ‘solution’ to Europe’s debt problems may well turn out to be just as deficient as all those that have gone before.”