Barometer points to grimmer outlook

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A snapshot of the sector - which includes financial firms and is seen as the driving force of the British economy - gave its worst reading since March 2003, when business was hit by the start of the Iraq war.

There was also grim news on the High Street in the wake of a miserable bank holiday weekend for retailers in London and around the country.

Exclusive research for the Evening Standard by SPSL showed Saturday was particularly bad in the capital, with shopper numbers down 3.8% on the equivalent day last year.

Retailers fared slightly better on Sunday when footfall was down 0.8%, but the improvement could not hide the pain on what was seen as a vital weekend for struggling stores.

With the housing market in turmoil, there is growing pressure on the Bank of England to cut interest rates from 5% to 4.75% on Thursday. However, economists expect the Bank to wait until next month to make its move.

Howard Archer of Global Insight said: "Thursday's rate decision is becoming a closer call by the day. The UK economic downturn is deepening and adding to pressure on the Bank to quickly cut interest rates again despite current elevated inflation levels and risks.

"We still modestly lean towards the view that the next cut in interest rates will come in June."

The Chartered Institute of Purchasing and Supply today said that its barometer of activity in the services sector fell to just 50.4 in April, down from 52.1 the previous month and now just above the key 50 level, which represents no growth at all.

Confidence continues to be undermined by the credit crunch. It plunged to its weakest since October 2001, the month after the 9/11 terrorist attacks in the US. Firms were also hit by rising costs as the price of fuel, energy and food soared.