'Risk of recession rising rapidly' as service sector slips into contraction

BRITAIN'S economy is hurtling towards "recession territory", experts warned last night, as data showed the dominant service sector shrinking at its quickest rate for nearly seven years.

Hotels, restaurants and financial services companies were among those hardest hit last month, as cost pressures and the uncertain economic climate took their toll.

The Chartered Institute of Purchasing and Supply (Cips) said its services activity index fell almost three points in June to 47.1, the lowest level since October 2001. A reading below 50 denotes contraction.

Yesterday's report followed gloomy snapshots of the UK's manufacturing and construction sectors, published over the previous two days. It is the first time the Cips' purchasing managers' series has shown all three areas contracting since November 2001, in the aftermath of the terrorist attacks on the US.

Vicky Redwood, UK economist at Capital Economics, said: "A weighted average of the three surveys points to GDP more or less stagnating by the end of the second quarter – a technical recession may be closer than we thought."

Economic contraction in two successive quarters constitutes a recession.

The service sector findings will be of particular concern, as the industries covered account for about three-quarters of the UK economy.

Paul Smith, senior economist at Markit Economics, which helped conduct the research for Cips, warned that the UK economy was heading towards "recession territory".

He said: "Following on from the dreadful figures for both construction and manufacturing, the services report confirms the broad-based deterioration in UK economic activity."

Howard Archer, chief UK economist at forecasting body Global Insight, said: "The latest data indicate that the downturn is deepening, and the risk of recession is currently rising rapidly.

"The credit crunch, financial market turmoil, slowing consumer spending and nose- diving housing market activity are clearly weighing down on the services sector."

Cips said its employment index recorded its second successive monthly fall in staffing levels as workloads shrank.

The barometer for new business fell to 45.1 – the lowest reading in the report's 12-year history.

News of a further deterioration in the service sector presents an additional headache for the Bank of England.

Policymakers meet next week to decide on the next move on interest rates. Governor Mervyn King is having to grapple with rising consumer price inflation, currently at an 11-year high of 3.3 per cent, and slowing economic growth.

The Cips surveys showing contraction in the services, manufacturing and construction sectors but sharply rising prices provide ammunition to both those arguing for an interest rate rise and those wanting a cut.

Archer said: "Weak service sector activity yet still rising price pressures encapsulates the extremely difficult position that the Bank of England is in.

"For now, we believe it is most likely that the Bank will sit tight for an extended period while it monitors both the upside risks to inflation and the downside risks to growth, but much will clearly depend on whether or not wage growth remains contained."

Redwood said the three Cips' surveys were "further evidence that the economy is heading for a nasty downturn".

• The US service sector shrank unexpectedly in June, according to the Institute for Supply Management. Its non-manufacturing index came in at 48.2, down from 51.7 in May.