LONDON (Reuters) - The rate of contraction in the service sector eased in March to its slowest for six months, though companies shed jobs at their fastest pace for over a decade, a survey showed on Friday.
The CIPS/Markit services PMI activity index rose to 45.5 in March from 43.2, the highest reading since September but still below the 50-mark that separates expansion from contraction, having hit a record low of 40.1 in November.
Economists on average had forecast a rise to only 43.5.
Apart from employment, all the sub-indexes rose in the monthly purchasing managers’ survey.
Business confidence improved to its highest since August last year, before the collapse of U.S. investment bank Lehman Brothers damaged economic morale.
Nearly 40 percent of managers forecast a rise in activity over the next year, while just over 20 percent saw a decline.
“This is yet another glimmer of hope that there may be some light at the end of the long and twisting tunnel the UK economy has ended up in,” said Colin Ellis, European economist at Daiwa Securities.
“Together with the surprise rise in the manufacturing PMI earlier on this week, the pace of contraction in economic activity appears to be easing,” he added.
The pound strengthened after the data, building on gains from other strong data earlier this week and the hope of global recovery after the London G20 summit to reach a seven-week high against the dollar and a four-month high against the yen.
Services, including the public sector, make up about three quarters of British gross domestic product, which shrank at its fastest pace since 1980 at the end of last year. This year, the OECD has forecast Britain will suffer its sharpest downturn since World War Two.
Yet recent data has offered some grounds for hope that the downturn may be bottoming out, with manufacturing PMI data earlier this week also coming in more strongly than expected, and house prices recording a surprise rise in March.
“The latest upturn in the activity index and another improvement in business confidence to a post-Lehman Brothers high provide further evidence that the severe contractions in services output at the end of last year may now be behind us,” said Paul Smith, senior economist at Markit Economics.
“These developments subsequently augur well for an improvement in GDP later in the year,” he added.
Firms reported a shortage of new work as the biggest factor depressing the service industry, which has been contracting for the past 11 months — the longest run since the PMI survey started in July 1996.
The employment index hit a record low of 38.8, down from 40.4 in February.
“Falling levels of new business and streamlining to improve competitiveness were the principal factors driving job losses. Companies used a combination of natural wastage and redundancies to lower payrolls,” the survey said.
But businesses were more optimistic about the future, with some hoping that the recession would reduce competition as their rivals went bust or became takeover targets. Companies cut prices at their slowest pace since November, while falls in new business and outstanding business were the lowest since September.
But input prices rose at their fastest pace since November, with firms blaming sterling’s weakness against other currencies for pushing up the cost of imports.
“While there was some evidence that supplier charges had fallen over the month, as well as pay cuts being implemented, weak sterling ensured that inflation persisted,” the survey said.
Detailed PMI data are only available under licence from Markit and customers need to apply to Markit for a licence.
Editing by Ruth Pitchford and Chris Pizzey