Weak service sector puts growth at risk

Service sector performance deteriorated sharply in the last three months, increasing the risk of a severe slowdown in economic growth, the British Chambers of Commerce said yesterday.

The BCC's latest survey of nearly 6,000 companies showed the service sector weakening "across the board", with declines in domestic sales, export orders and employment expectations.

Director general David Frost said: "The deterioration is very disturbing, given the critical role of services in sustaining UK output and employment and given the persistent weakness of manufacturing."

The BCC said its index of service companies' domestic sales shrank to the lowest level since the end of 1998. The balance of firms saying sales had risen rather than fallen over the last three months dropped to 12% from 23% in the first quarter.

UK economist Simon Rubinsohn at Gerrard Securities said: "One explanation for the weakness in the service sector is the plunge in the retail sector which has been well documented elsewhere. The worry is that this is now beginning to spread beyond the high street to other service industries."

The service sector now accounts for two-thirds of Britain's economic output as the manufacturing sector has shrunk in the face of competitive pressures from cheaper factories in the far east. The health of the sector is therefore crucial to the economy.

The BCC survey is the latest data pointing to a slowdown in the economy. The labour market is starting to weaken, consumer spending is slowing and house prices are stagnant or falling. Mr Frost said: "With the economy slowing, and the business environment becoming more dangerous, the [Bank of England's] monetary policy committee must reduce interest rates quickly to the lowest level consistent with the inflation target."

The MPC is expected to cut rates at its meeting next month from the current level of 4.75%. David Kern, chief economic adviser to the BCC, said: "I had hoped the MPC would cut rates at this month's meeting."

The BCC has cut its economic growth forecast for this year to 2.0-2.1% from 2.4%. Economists have been steadily cutting their predictions for growth. Gordon Brown said in March's budget that he expected growth for the year to be 3-3.5%.