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Services Gloom Fuels Recession Fears

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Britain's service sector - the dominant part of the economy - shrank for a third month in a row in July as new business dried up in the face of the credit crunch and a weakening housing market.

The monthly snapshot of the sector, from banking to leisure, from the Chartered Institute of Purchasing and Supply/Markit found business confidence at its lowest in a decade, widespread job cuts and the amount of outstanding business contracting for a 10th straight month.

Although the survey was slightly less weak than the City had feared, today's report suggests that all three sectors of the economy - manufacturing, construction and services - are now in recession. The CIPS/Markit headline activity index stood at 47.4 last month, higher than the 47.1 recorded in June but still below the 50 level that marks the cut-off point between expansion and contraction.

"While services activity fell at a slower rate during July, the risks to future trends in the sector remained clearly skewed to the downside," said Paul Smith, senior economist at Markit Economics which compiles the survey.

"The record contraction in new business, severe cost pressures and deteriorating sentiment all point to the continuation of difficult times ahead."

It found only a marginal let-up in the cost pressures afflicting the service sector, with firms responding by raising their prices at a more rapid rate than a year ago.

City analysts believe the threat of inflation will prevent the Bank of England from easing the pressure on the economy with a cut in interest rates on Thursday.

Gloom in manufacturing

Meanwhile separate figures showed that manufacturing activity in June suffered its sharpest annual fall for over two-and-a-half-years, adding to concerns that the slump in UK production will help push the economy into recession.

The Office for National Statistics said that manufacturing output tumbled by 1.3% on the year to June, the largest fall since December 2005. The fall marked the fourth consecutive month of declines. The last time this happened was in December 2001.

So the service sector joins the manufacturing sector. Good job we have a fundamentally strong economy which will help us weather the coming economic storms.

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