Recovery hopes raised as service sector soars to a two-year high

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The Independent Online

Activity in the services sector rose to a two-year high in August, giving a boost to optimistic forecasts for the UK's recovery from recession.

Output grew for the third successive month and reached the strongest rate since September 2007, the sectoral index produced by the Chartered Institute of Purchasing and Supply (Cips) said. The index hit 54.1, where anything over 50 represents growth rather than contraction.

Companies reported higher levels of new business, despite clients' showing a continued reluctance to commit. And although services businesses are still cutting jobs, last month saw unemployment in the sector slow to its lowest rate of increase in a year. But despite the largely encouraging results, some of the gains from new orders were offset by price cuts, and average charges declined for the 10th month in a row.

David Noble, the Cips chief executive, said: "We've really seen a strong turnaround in the UK services sector in recent months. Nonetheless, the market is still somewhat fragile, and purchasing managers said growth was largely driven by reducing backlogs and continued discounting was needed to boost sales in a bid to beat tough competition."

A return to economic growth is by no means certain. The OECD, the international economic think-tank, yesterday predicted another quarter of recession in the UK and several more of stagnation into 2010. And Cips surveys of the construction and manufacturing sectors earlier this week were both downbeat. Although sentiment in the building industry suggest that the rapid declines of earlier in the year are bottoming out, the headline numbers on future orders in the manufacturing sector slipped back.

Howard Archer, the chief UK economist at IHS Global Insight, said: "While the August service sector survey makes generally very encouraging reading, some caution is advised. Significant handicaps remain to longer-term recovery prospects."

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