The service sector is cashing in on the improving economic climate, with growth in profits hitting a three-year high, new research has revealed.

A quarterly report by the Confederation of British Industry (CBI) and Grant Thornton found that business volumes increased at the fastest rate for over a year among professional services firms.

Consumer services firms, such as hotels and restaurants, did particularly well, with business volumes rising at their fastest rate in five years over the past three months.

The findings suggest a return to profitability for service firms who have suffered badly from the downturn in business trade and tourism over the past two years.

The survey also found that confidence among business service firms had increased for the third successive quarter and, while costs rose unexpectedly over the past quarter, profits grew at the fastest rate in three years.

Employment levels rose for the first time in 15 months, while expansion expectations increased significantly, with service firms more positive than at any time over the past three years.

The survey provides further evidence that the UK has all but emerged from the economic downturn of the past two years, with businesses in almost every sector confident that 2004 will be a profitable year.

Steve Edmonds, of Grant Thornton, said that there is real evidence of an upturn in the service sector.

“”Business and professional services firms are continuing their recovery, and increased optimism, improved performance and better profitability are also apparent among consumer services firms.

“However, rising employment costs and a growing skills shortage may still take the shine off the sector’s impressive results and restrict its growth,” he said.

Ian McCafferty, chief economic adviser at the CBI, said that business volumes had improved across the service sector, with growth in profits now at a three-year high.

“Last quarter’s positive expectations have turned into positive results and firms are currently predicting the strongest growth for five years.

“UK firms will be encouraged by the buoyant trading now evident in the service, manufacturing and retail sectors,” he said.