The economy probably ground to a virtual halt last month and may even have sunk into the grip of recession, economists said yesterday after another spate of bleak figures revealed growing frailty across critical sectors.

In a double dose of grim news about worsening conditions, the latest data showed shrinking activity in both the services sector, the engine room of the economy, and manufacturing.

Overall activity in the services sector contracted for a third month in succession last month, according to the latest purchasing managers’ survey of its conditions, with key gauges of future conditions pointing to an even more severe deterioration ahead.

At the same time, official figures for manufacturing showed that its output tumbled by 0.5 per cent last month, in a fourth consecutive monthly fall that marked the sector’s first sustained run of decline since 2001, scuppering its still-fragile recovery.

The latest confirmation of the economy’s growing plight sparked new warnings that Britain is heading into a severe downturn in the second half of the year. It also piled pressure on the Bank of England’s Monetary Policy Committee (MPC) to hold its fire on interest rates at the end of its latest two-day meeting, which starts today.

Most economists said that although yesterday’s figures did not make it inevitable that the economy would slide into technical recession in the present quarter, the data implied that Britain was clearly on the brink of suffering this fate.

Vicky Redwood, of Capital Economics, said: “The data just confirm that the economy has pretty much ground to a halt going into the third quarter. It doesn’t suggest we have entered a recession yet – but it doesn’t seem like a recession is far off.”

Yesterday’s CIPS/Markit services survey will be a key influence on the MPC as it debates its verdict on interest rates today.

The survey’s headline index of services conditions for last month edged higher, to 47.4, from a seven-year low of 47.1 in June, but this merely indicated that the vast sector was shrinking at a slightly less severe pace during last month. It still marked the second-worst headline reading since October 2001, in the aftermath of the September 11 attacks in the United States.

The survey’s main gauges of conditions facing services companies all flashed warnings of further trouble to come. Outstanding business in the services sector fell for a tenth month in succession last month, while the inflow of new business was the weakest since the survey began in 1996. Services groups’ expectations of future conditions also tumbled to a record low, leading them to cut jobs at an accelerated pace during July.

However, there was some reassurance for the Bank on its anxieties about inflation. The survey showed that both the costs of services companies and their prices to customers eased back from recent peaks, suggesting that weaker conditions may be starting to help to tame persistent price pressures.

City expectations that the Bank will hold interest rates this week were further reinforced by the further decline in manufacturing shown by yesterday’s official figures.

June’s latest slide in manufacturing output left industrial production as a whole, including utilities, mining and the North Sea, down by 0.8 per cent over the second quarter as a whole.

Since this is markedly larger than the 0.5 per cent figure that the Office for National Statistics factored into its initial 0.2 per cent estimate of GDP growth in the quarter, analysts suggested that this figure could now be revised down to show that the economy all but ground to a halt over the three months to the end of June, expanding by as little as 0.1 per cent.

The influential National Institute of Economic and Social Research estimated that growth in the three months to July was at exactly this level, putting the economy on the cusp of stagnation.

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