Service sector slowdown deepens as output and confidence both fall

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The Independent Online

The once-booming service sector has become gripped by falling prices, prompting calls for the Bank of England to be prepared to cut interest rates further when it meets this week.

Service sector output over the last three months slid on the previous quarter, while confidence in the sector fell for the third successive quarter. The findings come in research published today by the Confederation of British Industry and the accountancy firm Deloitte and Touche.

Firms servicing consumer industries suffered the most severe fall in output prices for three years, confounding expectations of a rise.

The CBI warned that deflation would persist in the service sector over the coming three months. It also said that the trend of rising employment in services was set to go into reverse. Sudhi Junankar, the CBI's chief economist, said: "The events of 11 September compounded an already deteriorating situation, especially for those firms reliant on the consumer. Confidence has taken a hard knock with hotels, bars and restaurants feeling the worst of this."

The Bank's Monetary Policy Committee meets this week to consider whether to change interest rates from their present 38-year-low of 4 per cent. Roger Bootle, economic adviser to Deloitte & Touche, said: "While some members of the MPC think their battle is with inflation, this survey makes it clear that for most business people their battle is with deflation."

Other research published today shows British manufacturing companies suffer from significantly poorer levels of productivity than US-owned companies operating in the UK.

The Engineering Employers Association, which conducted the research, says US-owned companies make greater use of "lean manufacturing" – waste reduction pioneered in Japan – and workplace initiatives such as staff performance appraisals.