Fresh recession fears after slowdown in services sector

Fears of a double-dip recession were fuelled yesterday after the UK's powerhouse services sector registered its slowest growth in more than a year, writes Russell Lynch.

The Chartered Institute of Purchasing and Supply's (Cips) activity index - where a score over 50 signals growth - fell from 53.1 to 51.3 last month, the biggest drop since May 2009.

Services firms are shedding jobs at the fastest rate since October last year, while sales growth is at a 14-month low.

Cips chief executive David Noble said it was "too early" to predict a return to recession but added: "The lowest growth rate in the services sector for over a year does seem to reflect what's been happening elsewhere in the economy. Austerity measures and the upcoming increase in VAT appear to be weighing down on confidence."

The UK economy roared ahead at its fastest pace for nine years between April and June, but the latest survey adds to mounting evidence of a sharp slowdown for the rest of 2010. It comes after downbeat surveys from Cips on manufacturing and construction this week, as well as falling house prices.

Based on surveys so far, Cips forecasts overall growth of 0.5 per cent between July and September - well below the 1.2 per cent in the second quarter.

Jonathan Loynes, of Capital Economics, said: "The fact that the surveys tend to lead the hard economic data by a few months means that GDP is still likely to post a reasonable expansion in the third quarter. But should the surveys continue to weaken in the next few months, the threat of a renewed contraction in Q4 and beyond would become very real."