Shrinking in services rings alarm for a triple-dip recession

Fears of a triple-dip recession were stoked yesterday after an alarming new survey revealed the UK's powerhouse services sector contracting for the first time in two years.

Economists said the worse-than-expected results of the latest monthly "health check" on services companies ranging from City banks to hairdressers painted a bleak picture for the year ahead.

The Chartered Institute of Purchasing & Supply's activity index sank to 48.9 last month, the worst since a snow-hit December 2010. Any score under 50 signals economic contraction.

It suggests that GDP may have sunk back into decline in the fourth quarter of 2012, dealing a huge blow to the Chancellor's hope of a swift return to growth. Despite a better December for manufacturers, Britain's builders are still in the doldrums, prompting the survey's compiler Markit to predict a 0.2 per cent slide for the economy between October and December after an Olympics-inspired bounce between July and September.

Deutsche Bank's UK economist George Buckley said: "The fall is consistent with broadly zero GDP growth, possibly even weaker, raising the risk that our forecasts for improving growth in 2013 are once again disappointed and that a 'triple-dip' may be in the offing."

The activity index was depressed by a fall in new business, with clients reluctant to commit to spending amid economic uncertainty. Companies have also cut jobs for three of the past four months.

The chief executive of Cips, David Noble, said services firms were showing a "distinct lack of momentum", adding: "The underlying trend is one of continuing uncertainty. Businesses are holding back on investment, leading to falls in employment and increased levels of spare capacity."

The news overshadowed mortgage approvals hitting a 10-month high in November in a further sign that the Bank of England's Funding for Lending scheme is breathing life into home lending. Approvals rose to 54,036, up from 53,071 on October and 3.2 per cent up on the same month in 2011. But they are still well below the levels seen before the housing market peaked in 2007.