Fears that Britain is sliding rapidly towards recession mounted again today after the economy’s dominant services sector shrank last month at the fastest pace for almost seven years.

The sprawling services industries, from leisure groups to accounting firms, saw their overall activity tumble during June at a rate not seen since the aftermath of the September 11, 2001 attacks on the US, according to the latest CIPS purchasing managers’ survey of the sector.

Worse than expected findings showed business levels in services plunging, a new spate of jobs cuts in the sector and business expectations among services groups plunging to the lowest levels in the survey’s 12-year history.

Yet the survey again showed the economy’s present, ugly mix of stalling growth combined with mounting inflationary pressures, once more raising the spectre of 1970s-style “stagflation”.

The CIPS gauge of costs for services companies surged to a new all-time high, while its measure of prices charged to customers in the sector was just short of recent record levels.

The survey’s headline index of overall conditions in the economy’s most crucial industries slumped to just 47.1 for last month. On a scale where any reading under 50 indicates contraction, this marked the second month in a row that the sector has shrunk.

The news came hard on the heels of the CIPS manufacturing and construction surveys earlier this week, which also showed those sectors contracting. It was the first time that all three industries have shrunk simultaneously in any month since November 2001.

Paul Smith, senior economist at Markit Economics, which compiles the findings, said that today’s results showed the economy was heading towards “recession territory”.

“Following on from the dreadful figures for both construction and manufacturing, the services report confirms the broad-based deterioration in UK economic activity,” he said.

Fears over a further slide in the sector were inflamed as the survey showed that inflows of new business to services companies fell last month at the fastest pace for at least 12 years. The survey’s new business index dropped to a record low of 45.1 in June, from 48.0 in May.

Despite speculation in markets that the Bank of England’s next move could be to raise the interest rate, the findings will pile pressure on the Bank’s Monetary Policy Committee to stay its hand next week, when it next meets.

Hotels, restaurants and financial services businesses suffered especially badly last month, CIPS said.

Today’s dire news is just the latest in a deluge of grim economic figures that have left a growing number of City economists predicting that the economy is sliding into the grip of a severe downturn, with odds on the first recession since the early 1990s shortening by the day.

Howard Archer, chief UK and European economist at Global Insight, said: “The very weak services sector purchasing managers’ survey continues the seemingly relentless bad news on the economy, and it is particularly worrying given the sector’s dominant role in the key UK economy.

“The latest data indicate that the downturn is deepening, and the risk of recession is currently rising rapidly. Weak service sector activity yet still rising price pressures encapsulates the extremely difficult position that the Bank of England in.”

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