Fears of double dip fade as service sector stages revival

Britain's all-important services sector pulled out of a snow-driven slump in January as hotels, caterers and restaurants bounced back, sparking forecasts of a return to growth for the UK after the economy's shock slide.

Financial information group Markit predicts the UK will expand a modest 0.4% in the first quarter after its 0.5% contraction in the final three months of last year but warned the economy is far from "out of the woods".

The forecast comes after services firms - which account for nearly three-quarters of output - recovered from December's snow to pick up the pace of growth to an eight-month high as hotels, restaurants, caterers and transport businesses all clawed back orders lost to the blizzards. The Chartered Institute of Purchasing and Supply's activity index - where a score above 50 indicates growth - reached 54.5 in January as services firms recovered from their first month of contraction since the beginning of the recession.

But the trend among services firms remains "one of only very modest growth, and well down on the strong rate seen in the first half of last year," Markit warned. Surveys earlier this week revealed a stellar performance from Britain's manufacturers but more sluggish growth from construction firms.

Chief economist Chris Williamson said: "I don't think the economy is out of the woods. It still very much depends on manufacturers winning exports and if the pound shows any sign of further strengthening that could hurt things."

The figures will fuel the debate at the Bank of England over whether to hike interest rates although markets bet on a rise sooner rather than later as sterling gained against the dollar.

The Bank's rate-setting Monetary Policy Committee meets next week with two of its nine members already calling for a rise to ward off above target inflation. Cips chief executive David Noble said: "The underlying trend is still subdued and we are some way off from the growth rates of activity and new business we saw last spring."

But services firms persist in cutting jobs and passing on higher prices to customers, driven by January's VAT hike and soaring costs. Noble added: "We expect that many companies are taking a cautious approach given the recent VAT rise and price pressures.