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Plunge in vital services sector adds to fears of UK double dip

Business activity in Britain's dominant services sector has fallen at the fastest rate since the economy was barely crawling out of recession, a CBI survey shows.

The quarterly survey of the employers' lobby, which is published today,reveals an accelerating decline in the consumer services industry, as well as a surprise drop in business and professional services.

The overall fall in activity is the worst since November 2009 when the economy was still reeling from the longest recession since the war.

The CBI said that consumerservices such as hotels, restaurants and travel suffered a steeper fall in business volume and value than expected as activity dropped at the fastest rate since late 2009.

Employment costs rose, pricesincreased ahead of their long-runaverage and profitability weakened. However, employment in consumer services fell more slowly than expected.

Weakening consumer business activity was expected but there was a shock slowdown in business and professional services such as law, accounting and marketing. The fall in volume was the first since November 2009, while the value of business sank at its fastest since that date.

Firms had expected growth on both measures and they now forecast further falls in the coming three months – the weakest outlook since the first half of 2009 when the economy was mired in the gloom of recession.

Business services suffered a shock plunge in selling prices over the quarter, driving the most severe drop in profitability since February 2009. Profitability is expected to fall again in the next quarter. On the bright side, employment rose slightly for thesecond straight quarter and is expected to increase again.

Richard Woolhouse, the CBI's head of fiscal policy, said the latest figures from the services sector were worse than expected.

"This quarter we've seen moreevidence of the ongoing decline in consumer services spending, as people with increasingly squeezed household incomes are forced to cut back their discretionary spending," Mr Woolhouse said. "What is new, and was notexpected this quarter, is that spending on business and professional services also fell."

The sharp slowdown in services, which make up about three-quarters of UK output, will stoke fears that the economy is weakening as real incomes fall and the Government's austerity measures bite.

The services sector does not include the retail industry, which is also struggling for business as consumers tighten their belts.

The majority of both consumer and business services firms said they did not plan to increase investment in the next year with uncertainty about demand cited as the main reason for limiting capital spending.

Business services firms' spending plans for IT are the highest since November 2007 as they target greater efficiency and speed in a bid to reduce costs.

Both those findings will alarm labour market analysts, since they suggest further increases in joblessness are likely in the coming months.

The CBI's gloomy survey, which was conducted between 29 July and 17August, appears to mark a sharp contraction after the Markit/CIPS purchasing managers' index (PMI) showed services activity picked up in July.

A prolonged contraction in the most important part of the economy would be disastrous for official growth and borrowing forecasts, which are already coming under pressure.

The Government's own figures showed that services output grew 0.5 per cent in the second quarter of the year, helping to offset weak production activity that dragged total output from the economy down to only 0.2 per cent.

Nor is the problem confined to the UK, with services business now also appearing to slow markedly in Europe. Recent data suggests the sector stagnated in the eurozone this month as weakness spread from peripheral countries to Germany, where growth in services ground to a halt.