A rebound in the UK’s services sector has picked up pace with business activity rising at the fastest rate for eight months in January, according to a survey.
The strong performance came in ahead of previous expectations for the industry.
The S&P Global/CIPS UK services PMI survey showed a reading of 54.3 in January, up from 53.4 in December. Previous estimates had shown a reading of 53.8 for January.
The score is above the crucial 50.0 threshold, which indicates that activity in the sector is growing rather than shrinking, for the third month in a row.
It is also the strongest performance for the sector since May last year.
Businesses in the wide-reaching sector said they had noticed confidence pick up among customers due to economic conditions improving and the expectation that interest rates will begin to fall.
This led to a boost in consumer spending at the start of the year, despite some firms still reporting cost-of-living pressures dragging on demand from households.
The survey includes responses from firms including pubs and restaurants, transport providers, real estate and financial services businesses.
Tim Moore, economics director at S&P Global Market Intelligence, said a “revival” in the sector’s performance gained momentum at the start of the year.
“New orders have also rebounded this winter as receding recession risks and looser financial conditions led to greater willingness to spend among clients,” he said.
Cost inflation also hit its joint-lowest level since February 2021, offering some relief to businesses benefiting from lower fuel and energy costs, and falling raw material prices.
Nevertheless, pressure to lift staff wages continued to push up business expenses, which some firms suggested had led them to hold back on hiring.
January’s PMI survey also showed that businesses were feeling significantly more optimistic about the future.
Just over half of those surveyed forecast a rise in business activity throughout 2024, while just 12% predicted a reduction, amid hopes that improved economic conditions would support growth plans.
However, other firms reported that geopolitical worries, Brexit trade frictions and UK political uncertainty could all limit business activity in the year ahead.
Mr Moore said: “Another uplift in business confidence in January provides a signal that elevated levels of geopolitical uncertainty have yet to exert much of a constraint on service sector growth projections for 2024.”
Samuel Tombs, chief UK economist for Pantheon Macroeconomics, suggested that the stronger sector performance could prompt the Bank of England to “take its time” when it comes to cutting interest rates.
This is because the Bank’s Monetary Policy Committee (MPC) watches the services sector closely for signs that a boost in activity is fuelling price rises.
Mr Tombs said: “January’s PMI data adds to evidence that the economy is quickly escaping the minor recession it likely experienced in the second half of last year.
“The MPC doesn’t need to see services CPI (Consumer Prices Index) inflation return to target-consistent rates before it cuts rates, but slow progress towards that goal over the coming months might delay the first cut beyond May, the date we currently expect.”
