Cuts threaten to knock recovery as jobs 'flatline'

The British economy is facing a sharp slowdown during the third quarter, with a possible contraction arriving at the end of the year.

Experts are forecasting that, as with the emergency Budget in June, the Government's spending review itself on 20 October threatens to erode business and household confidence still further – long before any cuts come into effect. Fears are also growing that the UK will witness a "jobless recovery".

The Bank of England's Monetary Policy Committee meets today and will announce its latest decision on rates and quantitative easing tomorrow. No move is expected his month, and a three-way split on direction is predicted. As other central banks such as the US Federal Reserve and the Bank of Japan ease monetary policy still further pressure is growing on the MPC to resume QE next month, to coincide with its next Inflation Report.

In its latest survey of sentiment in the services sector – comprising some 70 per cent of the economy – the Chartered Institute for Purchasing and Supply and the Markit research group said that business confidence had improved, but "remained historically low". Input price inflation is weighing on profits and uncertainty about the cuts is also "undermining sales growth".

Overall, the Cips/Markit index rose to 52.8 in September, a jump on the 51.3 reading the previous month, but it is still some way below its pre-recession norms of around 56. Figures above 50 presage expansion. Exports were looking relatively upbeat, but new orders pointed in the other direction. More worryingly, if trends in manufacturing and construction are added to give a picture of the economy as a whole, Cips/Markit says that a marked deterioration in the economy is likely.

The Cips report said that GDP growth "weakened sharply" in the third quarter, with the outlook "scarred by weak confidence, subdued order book growth, job cuts and austerity". Growth of just 0.4 per cent to 0.5 per cent is predicted, down from the 1.2 per cent bounce-back in April to June. The last three months of the year, said Cips, are "set for further weak growth as confidence remains in the doldrums". "Falling private-sector employment adds to recovery worries," it added.

Chris Williamson, the chief economist at Markit, said: "The risk of a slide back into contraction has risen, but growth in the fourth quarter could still go either way: businesses appear to be in a 'wait and see' mood.

"We saw business and household confidence deteriorate sharply following June's emergency Budget, and there is every chance that it could be knocked further by October's Spending Review – although we do not know to what extent business have already 'priced in' bad news."

A separate report, from KPMG and the Recruitment and Employment Confederation, indicated that even the growth in part-time and temporary work – one of the few bright spots – was stalling, and that permanent employment remains a relatively distant prospect for many.

Kevin Green, the chief executive of the REC, said: "The jobs market is starting to flatline and may herald a 'double dip' in employment. Whilst there is marginal growth, these figures are the worst for a year. The Government must do everything possible to avert the threat of increasing unemployment."