Economy suffers slowdown as double dip looms

Analysts gloomy after fall in construction orders and decline in business confidence

Economists fear the dangers of a double-dip recession are "growing alarmingly" after the release of the latest "grim" survey of business confidence in the service sector, and evidence of collapsing order books in the construction industry.

As the Bank of England's Monetary Policy Committee prepares to meet for its next session next week, the news adds to the pressure on the Bank to resume its programme of "quantitative easing", the direct injection of money into the economy.

The Chartered Institute of Purchasing and Supply (CIPS) reported yesterday that business sentiment remained "historically low", with pessimism about jobs driving the reading sharply down. The CIPS services index fell for the second month running, from 53.1 in July to 51.3 last month. Although suggesting a marginal expansion in services activity in coming months – the reading being above the benchmark figure of 50 – the trend is clearly downwards.

Adding the most recent results for manufacturing and construction shows the CIPS composite index, representing the vast bulk of the economy, suggesting that a marked slowdown is coming. The weighted average of the three indices declined further in August from February's post-recession peak, dropping 1.8 points – the largest decline since November 2008. The increase in output signalled in August was the weakest since June last year.

With thousands of jobs due to be cut in the public sector in coming months, the private sector seems ill-prepared to take up the slack. Service sector companies reduced their staffs in response to the continuing slowdown of new business growth in August, and the rate at which jobs were lost was the strongest since last October.

Chris Williamson, chief economist at Markit, which conducts the CIPS survey, said: "Our model is signalling a GDP increase of 0.5 per cent for the third quarter, meaning the second quarter 1.2 per cent surge in GDP will represent a peak in the recovery cycle.

"Disappointingly, the rate of job losses in private sector service companies has picked up sharply again to the highest since last October as companies remain worried about the outlook.

"Confidence about the year ahead has failed to recover from June's record drop, with public sector spending cuts and the looming VAT hike in January creating uncertainty over the future direction of the economy."

The disappointing survey came on the day the Office for National Statistics published gloomy news for the construction sector. Orders for the building trade plunged by 14 per cent in the second quarter, with few parts of the sector escaping the pain. The slowdown in the property market is again feeding through to the builders, while actual cuts in local authority and central government spending on housing and infrastructure is beginning to make their presence felt. Private housing orders in the second quarter of 2010 fell by 24 per cent compared with the previous quarter, and infrastructure orders were down by 22 per cent.

The results suggest that the strong second-quarter growth of GDP published by the ONS – recently revised up by 0.1 per cent to 1.2 per cent for April o June – may have significantly overstated the robustness of the recovery.

Economists are becoming increasingly downbeat about the prospects of the economy. Alan Clark at BNP Paribas, said the CIPS survey was "grim reading" and "reinforces the likelihood that the economy will begin to contract in the not-too-distant future".

Jonathan Loynes at Capital Economics added: "The three major sectors of the economy are now slowing sharply in tandem. The dangers of a double dip are growing alarmingly."