Services Sector Expands in February

The UK services sector continued to expand in February, according to the latest figures from Markit and the Chartered Institute of Purchasing and Supply. The headline Purchasing Managers' Index for the sector stood at 51.8, marginally unchanged from 51.5 in January but remaining above the 50.0 threshold that points to output growth. As the sector makes up roughly three quarters of the total UK economy, these latest results are encouraging news.

The latest increase in service sector output was driven by levels of new work rising at the fastest rate in nine months. Promotions and stronger business confidence helped to boost demand, with confidence standing at its highest reading since May 2012. However, there is evidence that bottom lines continue to be squeezed by rising input cost inflation, with firms reporting pressure from higher fuel, food and utility prices. As a result, profitability continued to decline for the ninth consecutive period.

Today's figures come after PMI data from the manufacturing sector, released at the end of last week, showed a contraction in February. The overall reading for the sector was 47.9, well down from 50.5 in January and indicating a sharp drop in output. New orders for manufacturers fell for the second consecutive month and at the fastest rate since last July, constrained by tough domestic and overseas market conditions. Although cost pressures eased marginally this month, manufacturers cited the recent depreciation of sterling as producing upward pressure on the cost of their imports. In addition, PMI results released yesterday on the construction sector saw a steep decline in output in February, due to falling levels of commercial building and civil engineering work.

Although February's manufacturing and construction results were disappointing, the Markit/CIPS composite PMI indicator for the UK points to a marginal expansion in January and February for the economy as a whole. The economic outlook remains under significant pressure from squeezed real incomes, government austerity and an ailing eurozone, but the latest data continues to suggest that a fall back into technical recession will just about be avoided in Q1 2013.