UK economy slides as cuts bite into service sector and mortgage loans fall

The outlook for the UK economy darkened yesterday as data showed that output in the key service sector fell in October, while mortgage approvals slumped to a 20-month low in November.

Service sector activity declined by 0.4 per cent in October, reversing the 0.7 per cent rise seen in September, as the Government's fiscal squeeze began to bite. Half the drop was a result of weakness in the "government and other services" segment, according to the Office for National Statistics.

The month-on-month decline, the sharpest since April, suggests that the sector – the UK's biggest – is already being affected by the coalition's moves to axe spending. "Belief that service sector activity is going to be moderate rather than robust going forward is reinforced by the Bank of England's regional agents reporting in their November survey that 'services turnover growth had eased a little'," IHS Global Insight economist Howard Archer said.

Separately, figures from the British Bankers' Association showed that UK lenders approved 29,991 loans for home purchases last month, down from 30,689 in October and 45,740 in December last year.

This means approvals were down 31.7 per cent year on year, boding ill for the housing market. Net mortgage lending fell to £1.46bn in November, down from £1.72bn in October, though a slight uptick in gross lending suggested that the weakness was because homeowners spending more on paying down their debts.

"In our view, the housing market has got little going for it at the moment, apart from low mortgage rates – and that is if you can get a mortgage," Mr Archer said. The economist is expecting house prices to fall by around 7 per cent next year.