Growth of activity in the UK service sector settled around a solid level in January as market demand showed some stability following the sharp slowdown seen in the autumn, according to the CIPS/NTC Business Activity Index.

However, it revealed confidence in the sector continued to deteriorate as economic uncertainties persisted. Intense cost pressures were sustained as input price inflation was broadly unchanged on the joint record high registered at the end of 2007.

Providing some support to activity at the start of 2008 was an increase in new work, which rose solidly amid reports of firm demand, supported by successful marketing. There was evidence that confidence in markets remained brittle and reluctance among clients to commit significant new business spend, this was particularly apparent in the financial intermediation and hotels and restaurants sectors, where sales and activity both declined at the start of the year.

The index found that a number of service providers chose to add to their staffing levels during January. Employment in the sector continued to rise at a modest pace that was broadly unchanged on rates recorded in the previous two months.

Roy Ayliffe, director of professional practice at CIPS, says: "The year has not shown a promising start for the services sector, fuelling further speculation that the UK may be heading into a recession. Indeed, confidence of purchasing managers in the future performance of the sector has deteriorated to a seven-year low as widespread economic uncertainties and input price inflation continue to make their mark.

"On the upside, although the growth of the sector is still subdued, there are telling signs that it is stabilising after November’s four-and-a-half year low. Moreover, such gloom does not appear to have impacted employment levels, which have risen slightly. Purchasing managers attributed this to a slight increase in volumes of new work as well the implementation of successful marketing strategies."

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