Britain at serious risk of recession as orders fall sharply

Britain is now at "serious risk" of a full-scale recession, the British Chambers of Commerce warned today, as a series of new indicators suggests the economy is now slowing much more quickly than had previously been thought.

In particular, the BCC said that the services sector is experiencing a sharp downturn, publishing figures that show more firms saw a fall in the number of orders during than the second quarter than a rise, the first time this indicator has turned negative since 1990.

The BCC warned the UK now faces a "serious risk" of moving into recession, with its data suggesting a "menacing deterioration" in the outlook for the UK.

David Kern, the BCC's economic adviser, said: "The outlook is grim and we believe that the correction period is likely to be longer and nastier than anticipated."

The BCC's survey of 5,000 companies also shows that business confidence among services companies, which are responsible for three-quarters of the UK economy, is also continuing to fall, with sentiment also at its most depressed level since 1990.

The grim warning was underlined by new figures showing that manufacturing fell five times faster than economists had predicted during May. The Office for National Statistics said manufacturing output fell 0.5 per cent during the month, compared with the 0.1 per cent dip that City economists forecast.

The downturn in May means that manufacturing output over the past three months was down 0.2 per cent on the previous quarter, a more long-term measure that analysts take seriously.

Howard Archer, chief economist at the consultancy Global Insight, said the outlook for the manufacturing sector was poor, with the latest surveys of purchasing managers suggesting that output contracted further during June.

"The bad news on the UK economy is coming thick and fast at the moment, and the downturn appears to be deepening appreciably," Mr Archer said.

Hetal Mehta, senior economic adviser to the Ernst & Young Item business group, said that the figures were particularly depressing because a fall in the value of sterling during May should have boosted exports from the industrial sector.

"It appears that the weak pound is not boosting the industrial sector, indicating that overseas demand is weak as the global economy experiences a slowdown," he said.

The warnings come just two days before the Bank of England's Monetary Policy Committee is due to begin its monthly interest rate meeting. However, analysts said there was little prospect of an interest rate reduction while inflation remained high.

The BCC said its figures showed 45 per cent more manufacturers are currently planning price hikes than cuts, as the cost of raw materials continues to increase, underlining the inflation difficulties faced by the MPC.

Nevertheless, Mr Kern urged the committee to take action. "A major recession can still be avoided, but forceful measures are needed to improve confidence," he said. "The MPC must resist misguided calls for higher interest rates – indeed, if wage pressures remain muted, the option of early interest rate cuts must be considered."