Recovery in danger as service sector slips back

The risk that the economy may undergo a further contraction and a double dip recession was underlined yesterday with the release of further evidence suggesting that the economy is slowing down.

June's fall in service sector activity (comprising about 70 per cent of the economy), subdued mortgage approvals, and depressed consumer confidence point to third-quarter economic growth well below that seen so far this year. The figure will be published on 26 October.

The data arrived as the Bank of England's Monetary Policy Committee prepares to meet next week, and the Treasury enters the last stages o f the Spending Review, to be unveiled on 20 October, an event that itself may further dent business and household sentiment. Earlier this week Adam Posen, an American economist serving on the Monetary Policy Committee, issued a stark warning of a "lost decade" for the British economy unless the Bank steps up its programme of "quantitative easing", or QE, which has so far injected £200bn directly into the economy.

The Office for National Statistics said that activity in the service sector contracted by 0.2 per cent in June, the third-successive month where an already-modest pace of expansion has seen a decline. Improvements in the restaurant trade, retailing and wholesale distribution were more than offset by falls in road haulage and air travel. The extreme weakness in the economy this time last year, however, means that output is still up by 1.2 per cent on July 2009, the sixth consecutive month of improvement.

But the fragile condition of consumer confidence, set back by the emergency Budget in June and battered by talk of savage public sending cuts and job losses since, is highlighted in the latest barometer readings from NOP/GfK. Their Consumer Confidence Index decreased by two points in September to minus 20, meaning that a net 20 per cent of households believe that their personal financial situation will deteriorate over the next year.

This loss of confidence is feeding through to the housing market, where the shortage of mortgage finance in the credit crunch has been joined by a decreasing demand for loans from increasingly nervous individuals. Thus the Bank of England reported new mortgage approvals of 47,372 in August, a touch lower than July and broadly in line with expectations – but not much more than half the flow that would underpin a healthy market and a six-month low. Experts are predicting a fall of 10 per cent in property values over the next year, which would further erode confidence. Even the relatively encouraging data on productivity published by the ONS yesterday – with output per head rising by 1.4 per cent implies little pick-up in employment as output expands.

Howard Archer, an economist at Global Insight, said: "It is evident that support for further QE is rising in the MPC, but we suspect that for now at least the Bank will hold fire."