By Daniel Hunter

A return to growth of the UK service sector was signalled at the start of 2013 as volumes of incoming new business increased and companies boosted capacity by adding to their payrolls.

Confidence in the future also strengthened, reaching an eight-month high, but margins continued to be squeezed as output charges rose at a considerably slower rate than input costs.

The headline seasonally adjusted Business Activity Index rose back above the 50.0 no- change mark in January to signal a return to expansion following December’s first fall in activity for two years. At 51.5, the index was indicative of a modest rise in activity, though still the best since last September.

Despite reports that the heavy snow and severe weather had hampered activity during January, the impact was insufficient to prevent a modest rise in activity and new business following the declines registered in December.

Panellists indicated an underlying improvement in demand, and better market confidence. Sales drives and successful marketing also helped support a solid increase in new business since December.

Service providers were confident of a rise in business activity over the coming 12 months. Despite some worries that public sector spending cuts will have an adverse impact on their company performance, business expectations amongst panellists were at their highest for eight months. A number of companies are forecasting an improvement in the economic climate. This is likely to bolster new business, and help support new product launches and planned company expansions.

There was also evidence from the panel that higher confidence had a positive impact on hiring decisions, with staffing levels increasing during January. Although modest, the rise in payroll numbers was the sharpest for six months as companies also sought to keep on top of current workloads.

“A huge sigh of relief accompanies these numbers, as a return to growth of the service sector in January greatly reduces the likelihood of the UK falling back into a “triple-dip” recession," Chris Williamson, Chief Economist at survey compilers Markit.

“Companies reported the strongest rise in services activity for four months, building on the promising news from manufacturers last week, where output was reported to have grown at the fastest rate for 16 months in January. Although construction remains a worry and continues to contract, the PMIs collectively point to the UK growing marginally again in January.
“Stronger growth would inevitably have been recorded had the country not suffered the heavy snowfall, suggesting the underlying trend is even stronger than these numbers indicate.
“With services companies’ confidence also picking up, new business rising for the first time in three months and hiring growing at the fastest rate for six months, the sector looks to be on a renewed upswing which should help the economy grow again in the first quarter.”

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