Service sector is sizzling at four year high

The UK’s powerhouse services industry — spanning hairdressers to accountants — is in its most upbeat mood for almost four years, putting the economy for faster growth today.

Despite a January blip for the Chartered Institute of Purchasing & Supply’s activity index, which eased from 58.8 to a seven-month low of 58.3, the survey remains strongly in growth territory. Following upbeat data from construction and manufacturers the surveys are consistent with quarterly growth of 0.8% — faster than the 0.7% seen in the final three months of last year.

“Even with the easing seen in January, the sector is still expanding at a rate that bodes well for another strong GDP reading in the first quarter,” said Chris Williamson, chief economist at survey compiler Markit.

Confidence is growing at its fastest since March 2010, with firms planning to keep hiring and raise investment amid rising hopes for a sustained recovery. Work backlogs are rising at their fastest rate since May 1997, prompting firms to push up prices, Cips added.

Rob Wood at Berenberg said January’s slowdown was “little surprise and no cause for worry”. He added: “Combined with a manufacturing PMI way above past averages and an outright booming construction sector, today’s services reading signals continued strong growth. Monetary policy is getting traction, employment is booming, and the UK’s main trading partner is moving further into expansionary territory.”

The merest signs of a January wobble for the UK services industry - three-quarters of the economy - underlines why the Bank of England is in no mood to take away the punchbowl yet.

Cips’ survey today was very good - still signalling growth well above trend - but not shooting out the lightbulbs. Unemployment is careering down towards the Bank’s 7% threshold for considering rate rises under forward guidance.

But in the words of Governor Mark Carney’s predecessor Lord King, “it’s the levels, stupid”: so long as the UK remains below pre-recession peaks, the Bank will be reluctant to act.

Carney said himself in Davos “the recovery has some way to run before it would be appropriate to consider moving away from the emergency setting of monetary policy”.

Unless you’re a saver, with inflation at 2% what’s the rush? More pressing for Bank’s rate-setters as they gather today is tweaking guidance as well as keeping an eye on possible financial instability from a rapidly recovering housing market. In the meantime, have another glass of punch.