UK service sector grows in Jan, outlook brightens - PMI

By Olesya Dmitracova

LONDON, Feb 5 (Reuters) - Britain's dominant service sector returned to growth in January and optimism among companies jumped, a survey showed on Tuesday, reducing the chance of the economy falling back into recession.

The Markit/CIPS Purchasing Managers' Index (PMI) for services rose to 51.5 from 48.9 in December, when the sector shrank for the first time in two years.

That was the strongest reading since September and beat the median forecast by analysts of 49.5 in a Reuters poll.

"A return to growth of the service sector in January greatly reduces the likelihood of the UK falling back into a 'triple-dip' recession," said Chris Williamson, economist at survey compiler Markit.

After only one quarter of expansion, Britain's economy contracted again at the end of last year. That put it on the brink of its third recession in four years as defined by at least two consecutive quarters of contraction.

The survey is likely to add to expectations that the Bank of England will opt against policy changes when it ends a two-day meeting on Thursday and will judge its existing monetary stimulus for the economy sufficient for now.

Growth in the service sector, combined with a tick-up in manufacturing and a fall in construction output, points to modest economic growth at the start of 2013 despite disruption from unusually poor weather, Williamson said.

"Stronger growth would inevitably have been recorded had the country not suffered the heavy snowfall, suggesting the underlying trend is even stronger than these numbers indicate."

The service sector accounts for more than three-quarters of Britain's gross domestic product, including public services not covered in the survey.

The index measures change in activity including income and chargeable hours worked compared to the previous month.

Stronger demand drove the rise in the overall services activity, as well as in new business, Markit said.

Firms beefed up their workforces - with the employment index reaching its highest since July - to cope with new business or as part of investment plans.

An index measuring business expectations climbed to its highest since May, despite some worries over intensifying spending cuts by the government.

However, inflation posed a growing problem for firms and for their clients. Prices charged rose at their fastest pace since June 2011 although much more slowly than the increase in costs for service providers.

The services survey covers transport, storage and communication, financial intermediation, business services, personal services, computing and IT and hotels and restaurants, but excludes retail. (Editing by Hugh Lawson)