Gloom grows as rate-setters meet

A snapshot of the services sector showed the engine room of the British economy lurching towards crisis, with business declining for the first time in five years and jobs going at hotels, restaurants and financial firms.

Building society Nationwide, meanwhile, reported that consumer confidence fell last month to its lowest since at least 2004 as households felt the pain of the rising cost of living and lower disposable incomes.

Homeowners and businesses are desperate for some relief from interest rate cuts but this looks highly unlikely with inflation being driven higher by rising oil and food prices. The Bank's monetary policy committee is widely expected to leave rates on hold when its two-day meeting ends tomorrow.

Howard Archer of Global Insight said it "appears to be a stone dead certainty" rates will stay at 5% while KPMG chief economist Andrew Smith said a rate cut "is pretty unthinkable" with inflation heading towards 4%.

Inflation is at 3% but is expected to rise this month - forcing Bank Governor Mervyn King to write a second "Dear Chancellor" letter to Alistair Darling to explain why it is so far above the 2% target.

The services sector, which accounts for more than two-thirds of the economy, suffered a major slump last month as demand fell and prices rose, according to a key report by the Chartered Institute of Purchasing & Supply.

Its headline index of activity fell to 49.8 - its first reading below the crucial 50 mark that splits decline and growth - for the first time since March 2003. Employment fell at the fastest pace on record as hotels and restaurants cut staff and jobs were axed in the City.

Paul Smith of NTC Economics said: "The latest set of results makes for rather grim reading, with the worry of stagflation in the UK now becoming increasingly real."

Nationwide's measure of consumer confidence fell to the lowest since the survey began in May 2004. "Consumers are starting to feel the pinch," said chief economist Fionnuala Earley.

OECD FLAGS BIG SLOWDOWNFOR BRITAIN
Britain's economy is set for a sharp slowdown in growth over the next two years, the influential Organisation for Economic Co-operation and Development warned today. The OECD downgraded its 2008 growth forecast to 1.8% from its 2% previous estimate, while for 2009 it slashed its expectations from 2.4% to just 1.4%.

Falling house prices would hit British consumers hard, badly crimping the economy, it warned.

The organisation also urged the Bank of England's monetary policy committee to consider cutting interest rates in the coming months due to the extent of the looming economic slowdown. Britain was highlighted for particularly downbeat attention in the OECD's half-yearly outlook for its 35 member countries.