Services sector returns to growth

The powerhouse services sector returned to growth in January after December's snow, making it more likely that the UK will avoid a double-dip recession, according to a survey released today.

The latest Markit/CIPS Purchasing Managers' Index (PMI) survey - where a reading above 50 indicates growth - rose to 54.5 in January from 49.7 the previous month, helped by a recovery in orders after the snow disruption.

Activity in the sector, which accounts for about three-quarters of GDP, rose to its highest level since May but still faces challenges as input cost inflation recorded its highest jump since the survey began, which indicates further price rises on the way to consumers.

The sector increased its prices at the fastest rate since September 2008, partly as a result of January's rise in VAT to 20% from 17.5%.

The survey revealed that optimism rose to an eight-month high as the rate of new business picked up from December's contraction to register its strongest increase since April.

Declines in levels of employment eased only marginally since December.

David Noble, chief executive at CIPS, said: "It now seems clear that it really was the weather that had such a negative impact on the economy in December as we are now back to 'pre-snow' growth.

"The Government shouldn't be cracking open the champagne just yet though as the underlying trend is still subdued and we are still some way off from the growth rates of activity and new business we saw last spring."

The strongest rebounds in activity in the services sector were recorded by some of the industries most affected by the previous month's Arctic conditions, such as hotels, catering, restaurants and transport. But there were also better performances from business services, computer and IT services, which are less affected by the weather.

Earlier this week, the manufacturing sector reported record growth in January and construction returned to growth after slipping into decline in December.

The growth shown by the three surveys makes it less likely that the UK economy will contract in the first quarter of 2011, following the surprise 0.5% decline in GDP in the final quarter of 2010.

Markit estimates that the UK economy is on track to grow by 0.4% in the first quarter of 2011 but warns it will be some time before manufacturing is able to drive robust growth in the UK economy.

Vicky Redwood, senior UK economist at Capital Economics, said: "The big picture still seems to be that underlying growth has slowed sharply since the middle of last year and is now trundling along at a pretty mediocre rate."

She expects the recovery to remain sluggish and said the Bank of England is unlikely to raise interest rates all year as a result.