Britain heads for full recession as services and industry feel crunch

Britain today stood on the brink of full-blown recession as the economy showed signs of buckling under the global financial crisis.

Figures from the Office for National Statistics showed the services sector, which makes up more than three-quarters of the economy, failed to grow for the first time in six years in the three months to the end of July.

British manufacturers last month suffered their worst period since the early Nineties as output plummeted and factories slashed jobs.

City economists said the "dismal" news, along with the escalation of the banking crisis, meant Britain was heading for a nastier recession than feared.

Malcolm Barr, economist at JP Morgan Chase, said: "Our forecast had anticipated a 'recession-lite' experience for the UK. We are downgrading our forecast to show a deeper and prolonged period of weakness - a meaningful recession rather than just one in name."

But hopes were raised that the Bank of England could cut interest rates as early as this month. Mr Barr expected a cut from five per cent to 4.75 per cent on Thursday next week rather than in November. He forecast that rates would fall to 3.25 per cent next year, as opposed to his earlier forecast of four per cent.

A rate cut would bring relief to millions of households struggling with mortgage repayments. Inflationary pressures eased last month as the price of oil and other raw materials fell. Signs that inflation may be reaching its peak raised hopes that rates could be lowered. In the service sector, hotels, restaurants, pubs and clubs came under pressure as consumers cut back spending in the response to soaring prices and job insecurity. Experts said conditions in the sector will get worse, as it includes financial services firms such as stockbrokers and banks. The manufacturing sector suffered its worst month on record in September, according to the Chartered Institute of Purchasing and Supply. Output plunged along with new orders from home and abroad, and firms slashed jobs in a bid to cut costs. Cips' barometer of activity in the sector, where 50 is the cut-off between boom and bust, crashed from 45.9 in August to 41 last month - the weakest reading since records began 17 years ago.