By Daniel Hunter

UK service sector growth was sustained in February, albeit at the slowest rate for three months as a weaker increase in new business was recorded. Moreover, sales were in part supported by discounting, with output charges down modestly despite a continued rise in input prices.

Meanwhile, employment increased slightly and expectations for the year ahead rose to their highest in 12 months.

The headline seasonally adjusted Business Activity Index — which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago — registered 53.8 in February, down from January’s 56.0.

Although a three-month low, at this level the index was indicative of a solid increase in service sector activity. Growth has now been recorded in each month since January 2011.

“Despite seeing some loss of momentum in February, the service sector continued to grow at a robust pace, adding to signs that a double-dip recession will be avoided," Chris Williamson, Chief Economist at survey compilers Markit, said.

"So far this quarter, the sector has notched up its best performance since the spring of 2010, when the economy was rebounding strongly from the recession.

“Combined with the ongoing modest growth in manufacturing and upturn in the construction sector, the latest services PMI data suggest that the economy will expand modestly in the first quarter, provided that no significant further loss of momentum is seen in March. The outlook in fact seems to have brightened, with business confidence about the year head hitting a 12 month high and firms again taking on more staff in February.

“However, the rate of job creation remains disappointingly weak, and firms often have to offer discounts to win new business, providing reminders of how tough the business environment remains for many companies.”

Driving service sector output higher in the latest survey period were reports of new business wins in line with a more supportive economic environment. Growth of new work was recorded for a fourteenth successive month in February as companies focused on converting pipeline enquiries into secured contracts.

That said, a number of panellists commented that the business climate remained challenging, the net result being a fall in sales growth to the slowest since last November. Moreover, there was some evidence of price discounting to support new business wins. This was borne out by February’s data on output charges which showed the steepest monthly fall since November 2009.

Efforts to stimulate demand, market competition and client pressure to lower tariffs were reported as the principal reasons for the fall in output prices. Moreover, deflation occurred despite a further round of input price increases. Fuel and higher supplier tariffs reportedly drove input costs up in February.

However, amid some evidence of reduced employment costs, the pace of overall price inflation eased to an 18-month low and was well down on rates seen a year ago.

Employment in the UK service sector rose for a third successive month in February, although the rate of growth was only marginal. Companies were also able to make further inroads into work outstanding, which were down for an eleventh successive month.

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