By Marcus Leach

September’s Markit/CIPS survey of UK service providers indicated an improvement in business activity growth following the steep deceleration registered in August.

Higher activity was supported by an improved trend in new business, amid some reports of stronger demand.

However, rates of growth remained below trend and, with backlogs down modestly, companies on the whole remained reluctant to take on new staff. Business confidence also continued to soften in September, hitting a 30-month low.

The headline index from the survey is the seasonally adjusted Business Activity Index. In September, the index read 52.9, a solid improvement on August’s eight-month low of 51.1. Growth has now been maintained for nine successive months although, over Q3 as a whole, the index averaged its lowest quarterly reading of 2011 so far (53.1).

Higher activity was in part driven by a solid month of new business growth as strengthened demand, marketing and new product releases all served to bolster contract wins. There was some evidence that new orders had risen from a low base, and that companies worked hard to secure business amid reports that clients remained somewhat uncertain in a difficult trading environment.

The latest survey marked the ninth consecutive month that incoming new work had risen, but nonetheless a degree of spare capacity remained evident as backlogs of work outstanding fell further in September. In some instances, companies commented that gains in new business were insufficient to replace recently completed contracts.

In line with the general trend seen since the start of the year, employment levels were broadly unchanged in September, rising only fractionally. Reports of hiring additional staff to meet higher new business volumes were generally offset by the non- replacement of leavers or evidence of company restructuring.

Reluctance to take on additional staff in part also reflects some uncertainty about future operating conditions. Although remaining in positive territory, business confidence in the UK service sector hit a 30-month low in September. There was some concern of a continuation of the difficult economic climate and that investment from both the public and private sectors would be reduced. Where activity is forecast to increase, a number of panellists are expecting a positive uplift from the 2012 London Olympics.

“A surprise uplift in growth is welcome news, coming on the back of a similar upturn in manufacturing, but masks the fact that all is not well in the UK services economy," Chris Williamson, Chief Economist at survey compilers Markit said.

“Activity bounced back from August’s eight-month low, but August had been disrupted by riots in some cases, and many firms also reported that the ongoing expansion was only achieved by eating further into backlogs of work.

"This is clearly not sustainable and growth of new business will need to pick up in the coming months to prevent a downturn in both business activity and employment in the final quarter of 2011. Companies are already reluctant to take on extra staff, with employment more or less stagnating in September, as worries about the economic outlook at home and abroad intensified. Business confidence about the year ahead slipped to its lowest since March 2009 and is running at a level only ever seen before in periods of crisis.”

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