Services sector on the rise again

The powerhouse services sector grew for the sixth month in a row in June, although business confidence slumped to its lowest for more than half a year amid fears over the faltering economic recovery.

A Markit/CIPS survey, where a reading of above 50 indicates growth, showed that activity rose to 53.9 in June, marginally up on the 53.8 the previous month but still below its long-term average.

New business increased in the month as the sector bounced back from the disruption caused by the recent bank holidays for Easter and the royal wedding, and work commenced on previously delayed projects.

However, the rate at which new business increased fell to its lowest level since February and optimism levels were at their worst since October as companies gave a downbeat assessment of current economic conditions.

Today's result means that the services sector, which accounts for some three-quarters of the economy, grew at 0.5% in the second quarter of 2011, down from 0.8% in the previous three months.

This added to fears that the UK's economic recovery has slowed in recent months. Economists at Markit estimate the economy grew at 0.3% in the second quarter, compared to 0.5% in the first quarter.

Uncertainty around the economy also meant that employment levels were flat as companies lacked the confidence to take on new staff.

CIPS chief executive David Noble said: "Steady and solid new business growth is helping the UK service sector keep its head above water as activity coasts at a below average pace.

"Moreover, a downbeat mood is evident amongst some in the sector as confidence regarding future activity softened significantly during June. Businesses are less than sure-footed due to worries around austerity measures and general economic conditions."

Companies' input prices increased at their slowest rate since December, but the rising cost of food and utility prices meant inflationary pressures remained high. However, not all of these price hikes have yet been passed on to consumers.

Consumer spending has been squeezed in recent months as household pay fails to keep up with rising inflation.

This has created tough conditions on the high street, with retailers including Jane Norman and Habitat having fallen into administration, while other store chains such as Carpetright and Thorntons have announced store closures.

Howard Archer, chief economist at IHS Global Insight, said the survey was better than expected, which was a "relief" given a recent flurry of disappointing data and surveys on the economy.

He added: "Nevertheless, the survey still only points to mediocre rather than strong growth, and it does little to boost hopes that the economy could be starting to come out of its soft patch."