By Maximilian Clarke

Business confidence is up in the eurozone as the bloc’s dominant services sector stabilised in January, reversing more than a third of a year’s contraction.

However, the gains in activity are marginal and despite a rise in confidence, overall business optimism remains near historic lows and businesses across Europe are purportedly seeking to trim headcount, further eroding consumer confidence. This is according to the latest Markit/ CIPS purchasing managers’ index.

The survey calculated a figure of 50.4, where 50 denotes growth- ahead of the 48.8 seen at the end of 2011.

“A marginal increase in service sector activity in January provides welcome news that the sector may be showing signs of stabilising after sliding back into contraction during the final four months of last year,” explains Chris Williamson, Chief Economist at Markit.

“Business confidence rose to a five-month high, linked in many cases to companies believing that the worst of the region’s debt crisis is now over. Inflows of new business fell, but at the weakest rate since last August. The rate of decline has now eased for three months to suggest that demand may be recovering.

“However, there are many reasons to be cautious as to whether a dip back into recession will be avoided. Confidence may have risen but remains very low by historical standards of the survey, linked to the fact that inflows of new business continued to fall and that lower prices often had to be offered to win sales, which will dent profit margins. The region’s debt crisis is also by no means resolved, and any setbacks in current negotiations could easily cause confidence to slump again.

Inflows of new business declined for the fifth successive month in January. The rate of contraction was the weakest seen over that period, however, having now eased for three consecutive months. Inflows were broadly unchanged in both France and Germany, while Spain and Italy saw further reductions in new work — although the rates of contraction were slower than one month earlier.

With inflows of new work still falling, companies were reliant upon previously placed orders to support activity. Backlogs of work fell in all of the nations covered by the survey, with the steepest reductions seen outside of the big-two nations. More encouragingly, the overall rate of decline in backlogs of work eased for the second month in a row to the weakest since last August.

“It is not surprising therefore to see companies trimming headcounts to cut costs in the face of what many firms see as a challenging year ahead,” added Williamson.

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