Service sector shows confidence but fears of slowdown remain

HOPES that the economy can avoid a slide back into recession were lifted yesterday with news of a surprise pick-up in Britain's key service sector.

But there was a warning that growth is likely to stall in the months ahead as austerity measures and tax hikes hit spending.

The service sector accounts for some 70 per cent of total UK economic output and encompasses everything from banks and legal firms to hotels and restaurants.

According to the latest industry snapshot from the Chartered Institute of Purchasing and Supply/Markit, activity grew unexpectedly in September from a 15-month low the month before.

The main purchasing managers' index showed a reading of 52.8, up from 51.3 in August and confounding analysts' expectations for a drop to 51. Any reading above 50 denoted growth.

Economists said the news could ease worries over the UK heading into double-dip territory. It also added to expectations that the Bank of England will hold off a little longer from further money-boosting efforts at this week's rate-setting meeting.

Despite the welcome recovery in services output growth, the survey's new business component slowed to a 15-month low of 51.3 from 51.4. Business expectations for the coming year increased to a four-month high but remained subdued.

Markit's chief economist, Chris Williamson, said: "Inflows of new work and prospects for the year ahead have been hit by widespread worries that the recovery is losing steam, cancelled government contracts and the prospect of more cuts to come. The lack of confidence is consistent with a downturn in business activity in the coming months."

Experts believe the shaky outlook will not be enough to prompt Britain's central bank to extend its quantitative easing (QE) programme to boost the money supply.

It is thought the bank will this week hold rates at their historic low of 0.5 per cent and QE at 200 billion, with a potential for more money printing once the official third-quarter growth figures have been released.

This is despite the Institute of Directors renewing its plea for a 50bn increase in QE "before the public-sector recession begins".

Ben Williamson, senior economist at CEBR, said: "(The Bank of England's monetary policy committee's] inflation hawks will undoubtedly point to the increase in services and construction PMIs as signs that the economy is not cooling as quickly as previously thought and that the committee should re-focus on tackling above-target inflation."

The figures on the services sector follow PMI data on the construction industry, released on Monday, which showed an unexpected increase in activity last month.