The UK’s services sector had its best quarterly performance in Q3 since the second quarter of 1997, although consumer-facing industries continued to struggle due to the squeeze on incomes, new research shows.

Activity and new business both rose in September at rates close to August’s highs, while there was a return to solid employment growth following the previous month’s slowdown, according to the Business Activity Index from Markit/CIPS.

After accounting for seasonal factors, the Index recorded a level of 60.3 last month, only fractionally down on August’s near seven-year high of 60.5 - a figure over 50 indicates growth. It extended the current run of continuous growth to nine months.

Over the third quarter as a whole, the index averaged its highest level since Q2 1997.

September’s survey showed business confidence strengthened with over 50% of the survey panel forecasting an increase in activity from present levels in 12 months’ time.

“Companies were buoyed by the recent positive trend in new business and are widely expecting economic conditions to strengthen further in the coming year.”

Operating costs continued to increase during the latest survey period. Inflation remained marked, with fuel and utilities remaining amongst the primary driver of higher overall prices. Some panellists reported that wages had increased.

Chris Williamson, chief economist at Markit, said: “Businesses in the vast service sector reported an ongoing growth spurt in September, expanding at a rate just shy of August’s recent high. The buoyant data follow similar upbeat surveys of the manufacturing and construction sectors, and collectively the surveys suggest the economy will have expanded by as much as 1.2% in the third quarter; its fastest growth rate since the pre-crisis days of 2007.

“Growth is being led by financial services (linked in part to increased housing market activity) and the business sector. Consumer-facing services continue to struggle, reflecting the ongoing squeeze on incomes due to weak pay growth and high inflation.

“There are encouraging signs that the strong pace of expansion will persist in the coming months: September saw one of the largest inflows of new business ever seen by the services survey, business confidence about the year ahead picked up again and other surveys have shown the mood among households to have also improved.

“Not surprisingly, employers are taking on more staff to meet growing demand, which should help bring unemployment down