Read the Tempus analysis on the services sector

Calls for another aggressive cut in interest rates by the Bank of England intensified today after a key survey revealed that the UK services sector shrank in November at its fastest pace since the series began in 1996.

The Chartered Institute of Purchasing and Supply/Markit purchasing managers’ index for the sector fell from 42.4 in October to 40.1 last month — below the consensus forecast of 41.2 and the seventh month below the growth threshold of 50.

Today’s dire reading of the services sector, which accounts for around two thirds of the UK economy, follows record declines in manufacturing and construction activity, indicating that the recession could be deeper and longer than anticipated.

The Bank's rate-setting Monetary Policy Committee (MPC) starts its two-day rate meeting today, and will announce its decision at midday tomorrow.

Business groups have stepped up calls for a full percentage point cut, taking rates to 2 per cent, the lowest level since 1951. But a leading economist has called for a 150-basis point cut.

John Hawksworth, head of macroeconomics at PricewaterhouseCoopers, the accountancy firm, said that a failure to cut rates from the current 3 per cent to 1.5 per cent could heighten the risk of the country plunging into a depression

He said: "This is no time for half measures. We see no reason for the MPC to delay making a further one and half percentage point cut in base rates in order to mitigate the risks of the recession turning into a full-blown recession."

Commenting on the deterioration in UK services, Paul Smith, senior economist at Markit Economics, said: “The UK service sector data again surprised on the downside during November.

“Combined with the appalling numbers for manufacturing and construction, the survey confirms that recession is now snowballing and heading into deeper territory as 2008 draws to a close.”

Britain’s economy contracted in the third quarter for the first time since the recession of the early 1990s and surveys suggest the final three months of the year will be just as bad, if not worse.

The services sector spans businesses from cafes to banks and has been in the front line of fire as a global shortage of capital has forced banks to tighten lending.

The index measuring business expectations fell below 50 for the first time in the survey’s history, suggesting efforts to kick-start the economy with monetary and fiscal levers have yet to have the desired effect.

The Bank of England has cut interest rates by two percentage points since October, taking them to 3 per cent, their lowest since the early 1950s.

The survey also suggested that deflation will become policymakers’ biggest worry going into next year.

Prices charged by services firms fell last month for the first time in seven years, while input costs rose at their slowest pace since early 2002.

Explore Economics

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