By David Milliken
LONDON, Oct 5 (Reuters) - Britain's service sector expanded at its fastest pace for two years in September, and firms were more optimistic about the next 12 months than at any time since April 2007, purchasing managers' data showed on Monday.
The data suggested Britain's economy returned to modest growth in the third quarter of the year, but spare capacity in the sector and weaker performance in similar manufacturing and construction surveys meant the recovery was likely to be weak, survey compilers Markit said.
"With households and businesses continuing to rebuild their balance sheets, and the positive effects of loose fiscal and monetary policy likely to fade, the scenario of an anaemic growth path remains the best forecast at the present time," said Paul Smith, senior economist at Markit.
The headline PMI number rose to 55.3 in September from August's 54.1, its fifth successive month above the 50-level that divides growth and contraction and above economists' forecasts of a rise to 54.5, the data from Markit and the Chartered Institute of Purchasing and Supply showed.
The PMI expectations index rose to 75.0 from 72.3, with firms citing a better economic backdrop, more new business enquiries and plans to increase advertising.
Hotels, restaurants and business-to-business service companies reported particularly strong growth, while activity fell in the transport, storage and communication and personal services sectors, Markit said.
An improving economic climate helped new orders rise at the quickest rate in 19 months, but job losses continued for a 17th successive month, and at a faster pace than in August.
There was other evidence of slack in the sector too. Average prices charged continued to drop, increasing the period of deflation to 11 months, and levels of outstanding business also fell further, extending the longest unbroken decline in the survey's history to two years.
"Doubts will persist over the strength of the recovery. The survey continues to provide evidence of excess capacity," Markit's Smith said. (Reporting by David Milliken; Editing by Andy Bruce)