Double-dip recession fears loom amid market turmoil

CHANCELLOR George Osborne’s problems were mounting today as new fears over the eurozone’s debt, coupled with the worst slowdown in the powerhouse services sector in a decade, prompted fears of a double-dip recession.

As Mr Osborne prepared to give a keynote speech tonight in the City, he was also facing public scepticism over his tax plans as a new ComRes poll showed that 57 per cent of people opposed his intention of scrapping the top rate of 50p for Britain’s highest earners.

In another day of turmoil in the markets, there were falls across the board amid renewed concerns that Italy and Spain, the third and fourth biggest economies in the eurozone, cannot pay their debts.

The FTSE 100 dropped 3.58 per cent, while the Dax in Germany saw the worst fall of more than 5 per cent.

The fall in the markets saw bank shares taking the brunt of the latest stock market sell-off, with the largely taxpayer-owned Royal Bank of Scotland worst hit with a 12.3 per cent fall in value.

But the greatest domestic concerns over a double-dip recession were fuelled by a survey which revealed the services sector suffered its worst slowdown in activity in ten years.

The Markit/CIPS Purchasing Managers’ Index (PMI), where a reading above 50 indicates growth, showed services activity fell to 51.1 in August from 55.4 in July.

The drop was the worst for the services sector – which makes up about 75 per cent of the total economy – since the foot-and-mouth crisis of 2001, and was greater than declines seen after the collapse of Lehman Brothers bank in 2008.

Economists said the dismal figures pointed to a potential contraction in gross domestic product (GDP) in the third quarter of the year and increased pressure on the Bank of England to inject more cash into the economy to jump-start the recovery.

The slowdown in growth was driven by economic uncertainty and a weak underlying trend in new business, Markit said.

The volume of new orders rose at its slowest rate since February, the survey found, while business confidence was at its lowest this year.

Elsewhere, there was a further blow to UK jobs prospects as the service sector reported a further drop in employment.

The UK economy grew at a meagre 0.2 per cent between April and June, which included 0.5 per cent growth for the services sector.

Samuel Tombs, UK economist at Capital Economics, said: “With growth in all sectors of the economy now very weak, the chances of a double-dip in overall GDP are high and rising.”

There was some respite for the Bank of England on the inflation front as input prices eased in August, growing at the slowest rate since November last year.

Inflation was at 4.4 per cent in July – more than double the government’s 2 per cent target.

Howard Archer, chief UK and European economist at IHS Global Insight, said the survey had fuelled expectations that the Bank would hold interest rates at 0.5 per cent and increase its quantitative easing (QE) programme.

But he added further QE was unlikely “given still significant near-term inflation concerns”.

The Bank’s QE package is £200 billion. Adam Posen, a member of its Monetary Policy Committee, has called for a £50bn increase.