Recession fears as Britain’s services sector contracts

The Chartered Institute for Purchasing and Supply (CIPS) has revealed that Britain’s services sector shrank in September at the fastest rate since records began 12 years ago, adding to fears that a recession is unavoidable.

The CIPS index shows service sector activity fell to 46, a figure of less than 50 indicates contraction.

The news follows that from the CIPS earlier this week that the UK’s manufacturing sector is shrinking at the fastest rate since records began in January 1992.

Meanwhile, recent figures from the Office for National Statistics revealed that the UK economy has come to a standstill after it did not grow at all in the second quarter of 2008.

Some economists believe that the economy has contracted in the current three months and will continue to do so in the last quarter of 2008, meeting the technical definition of a recession.

The service sector makes up around 75% of the UK economy and the CIPS said hotels and restaurants experienced the largest contraction in output, an indication that the impact of the credit crunch is filtering into the real economy. The sector has experienced heavy job losses for the fifth consecutive month.

According to Paul Smith, senior economist at Markit Economics, the figures from the CIPS suggest the UK economy was in, or close to, recession.

The bad news is leading many analysts in the City to believe that the Bank of England may lower interest rates from 5% to 4.75% when it meets next week. Rates have remained the same since April in a bid to curb runaway inflation, which is currently at 4.4%.

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