New blow to revival hopes as services sector falters

A closely watched monthly health check of the dominant sector of the economy showed a score of 51.3, the lowest since April 2009 and close to the 50 cut-off between growth and decline.

The Purchasing Managers' Index, published by Markit and the Chartered Institute of Purchasing and Supply, also showed companies shed jobs at the fastest rate since October 2009 in response to fears about the impact of public spending cuts.

Markit chief economist Chris Williamson said: "While a double-dip recession remains unlikely, the survey suggests that the risk has increased and that growth looks set to be slow and choppy going forward."

Today's poll covers vast swathes of the economy including financial services, property, transport, communication, hotels and restaurants.

Combined with two other PMI surveys out this week covering manufacturing and construction, it suggests that gross domestic product growth has slowed dramatically from the 1.2% recorded in the second quarter of the year and may struggle to do better than 0.5% in the third quarter.

George Buckley, chief UK economist at Deutsche Bank, said: "The recovery looks unlikely to be plain sailing."

The gloomy mood was not helped by a 14% plunge in construction orders in the second quarter, according to latest figures from the Office for National Statistics.

David Noble, chief executive of Cips, said: "The next three months will be critical. Competition for new business will be fierce as companies contend with the pressures of higher costs, overcapacity and a wait-and-see attitude from buyers. These are tense times."

The survey raised hopes that inflation may drift back to below its target of 2% without the threat of higher interest rates and increases the chances that the Bank of England will step up its programme of quantitative easing.

City economists were dismayed by the weak picture drawn by the surveys.

Jeremy Cook, chief economist at World First, said: "While people may glance over the manufacturing figures with ambivalence, a decline in the services activity in the UK economy is a worrying, but not entirely surprising, development. Consumers are on the rack already and with the October spending review due to increase the pressure, things in the UK will get worse before they get better. We expect a stagnation of UK growth in the third quarter as a result."

Hetal Mehta, UK economist at Daiwa Capital Markets, said: "The services sector has been gradually winding down since February and today's data give added reason to be gloomy about the outlook. The further decline in employment also suggests that the labour market will be slow to improve, particularly with more public sector job cuts on the way. The services sector is key to the performance of the economy, and with this slowdown gathering pace, it is clear that the remainder of this year will see subdued growth. And while it may still be a little premature to say that the economy will experience a double-dip, the risks are increasing."