Unemployment fears rise as economy slows down

Growth set to miss government forecasts as activity in service sector slackens

Official forecasts for economic growth and job creation are falling further behind reality, with more strong evidence of a slowdown in the economy emerging yesterday with the release of the latest surveys of business sentiment.

The Chartered Institute of Purchasing and Supply (Cips) said that, while activity in the service sector edged up again in June, the pace of expansion was slowing and, crucially, generation of new jobs "remained minimal". Meanwhile, the Recruitment and Employment Confederation/KPMG Report on Jobs recorded a slackening in demand for permanent and temporary staff placements.

Permanent staff vacancies rose at the slowest pace in six months, while short-term staff vacancies increased at the weakest rate since November last year. Bernard Brown, a partner and head of business services at KPMG, said: "There has been a marked deterioration in the UK jobs market with permanent placements growing at their weakest rate in almost two years. A quick job market recovery in the UK now looks increasingly uncertain."

Though disappointing, neither piece of news is grim enough in itself to force the hand of the Bank of England's Monetary Policy Committee, which meets today to decide its next move on rates. The Bank is universally expected to leave rates on hold at their historic low of 0.5 per cent and, for the moment at least, not expand quantitative easing, the direct injection of money into the economy.

The Bank will at least be pleased that both surveys suggest little pressure on pay. The Cips/Markit purchasing managers index for the service sector showed a reading of 53.9, compared with 53.8 in May.

The headline business figure bears expectations of a small fall, and any figure above 50 points to continued expansion. But analysts pointed out that the increase did not reverse May's decline and the index remains some way below March's high of 57.1.

The forward-looking parts of the poll also pointed to further pain in the months ahead – and a serious shortfall in the official forecast of economic growth: the new business index saw the second consecutive fall, while a sharp drop in business expectations left this index at its lowest level since last October.

Vicky Redwood, the senior UK economist at Capital Economics, said last night: "The Cips surveys are now consistent with quarterly GDP growth in the second quarter of just 0.3 per cent or so."

Given growth of 0.5 per cent in the first quarter of this year, growth would have to accelerate over the second half of the year for the economy to reach even the modest 1.7 per cent expansion projected in the Budget. Next year's forecasts of 2.5 per cent growth also looks increasingly optimistic, implying higher borrowing figures for the Chancellor.

Chris Williamson, the chief economist at Markit, which compiled the the Cips survey, added: "The scope for the private sector to make up for public sector layoffs therefore still looks limited, meaning unemployment could stay stubbornly high for some time."