By Daniel Hunter

Business activity in the UK service sector increased for a second consecutive month in February. New business also increased, leading to a further expansion of payrolls.

Confidence also continued to improve, with optimism regarding future activity at a nine-month high. However, rising input costs squeezed operating margins, as competitive pressures continued to restrain the pricing power of service providers.

The headline seasonally adjusted Business Activity Index posted 51.8 in February, slightly above January’s 51.5 and a five-month high. Modest growth of activity has now been signalled for two successive months. More than 23% of respondents recorded increased activity since January, with anecdotal evidence suggesting stronger client demand led to the development of new projects and larger client bases.

New business increased at the sharpest pace for nine months in February, with panellists suggesting improved market confidence led to stronger client demand. Promotional activity and strong reputations were also noted as factors supporting new contract wins during the latest survey period.

Service sector companies remained confident in February, with over 46% of respondents expecting activity to rise from present levels in 12 months’ time. A number of respondents attributed optimism to improving market conditions, which are forecast to boost client demand and project volumes. Other firms mentioned planned company expansions. Overall, business confidence was the strongest recorded for nine months.

Activity and new order growth supported a further rise in payroll numbers during February. The rate of job creation quickened from January to reach a nine-month high, though remained modest overall.

“Faster growth of the dominant services sector offset downturns in manufacturing and construction during February, meaning the economy is likely to have grown for a second successive month after the downturn late last year," Chris Williamson, Chief Economist at survey compilers Markit said.

“So far, the PMIs suggest that the economy will have grown by 0.1% in the first quarter, barely making up for any of the 0.3% decline seen in the final quarter of last year. However, growth could turn out stronger than this as there is good reason to believe that at least some of the weakness in manufacturing and construction was due to business being disrupted by bad weather, meaning a brighter picture may emerge in March.

“Service sector confidence about the year ahead also lifted to its highest since last May, contributing to a pick up in employment, and adding to the sense that the economy is reviving, albeit sluggishly and somewhat hesitantly, rather than sliding back into another recession.”

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