- guardian.co.uk, Thursday July 3 2008 10.15 BST
Fears that Britain is heading into recession were heightened today on news of a worsening credit crunch and the worst performance by the service sector since the 9/11 terrorist attacks.
Two gloomy reports - from the Bank of England and the Chartered Institute of Purchasing and Supply/Markit - underlined the slowdown in the economy since the turn of the year at a time when the threat of higher inflation is blocking lower interest rates.
The monthly snapshot of the service sector - which accounts for around three-quarters of the economy's output - registered weakening activity. The index of purchasing managers dropped from 49.8 in May to 47.1 in June, the lowest level since October 2001. Any figure below 50 shows that output is falling.
"The services report confirms the broad-based deterioration in UK economic activity, with the composite PMI heading towards unprecedented (for the UK PMI surveys) recession territory," said Paul Smith, senior economist at Markit Economics.
"The issues facing the service sector are rooted in the dual shocks of both the financial crisis and - of rapidly increasing concern to service providers - surging global oil prices."
Higher costs mean services providers - ranging from banks to restaurants - are still raising their prices to partly offset record cost inflation, and that is likely to reinforce the view that the Bank of England is no position to cut interest rates yet. The Bank's monetary policy committee meets to decide the cost of borrowing next week, but with inflation at 3.3% is expected to keep bank rate at 5%.
In its quarterly survey of credit conditions, the Bank warned that the squeeze on households and businesses looked set to intensify over the coming months as lenders adopt a far more cautious approach. A backdrop of a weakening economy and the threat of rising defaults would make borrowing more difficult.
"Lenders reported that their expectations for the housing market, the changing economic outlook and changes in their appetite for risk had contributed to the decline in credit availability," the survey noted.
"Lenders expected these factors to contribute to the tightening in credit availability over the next three months."
Default rates on secured lending to households rose by more than anticipated in the second quarter and lenders expected a further increase in the coming months. A pick-up in corporate defaults was also anticipated.
