Fears of recession were heightened today as analysts braced themselves for dismal news from Britain's service companies after figures published yesterday showed that activity in construction plunged to an 11-year low.

The construction purchasing managers' index (PMI) survey fell to 36.7, down from 38.8 in June, as companies struggled with the soaring cost of raw materials and the seizure in the mortgage market. Any figure below 50 signals contraction rather than growth.

Residential housing was the worst hit, slumping for the eighth month in a row to a record low of 18.7, down from 25.6 in June, as housebuilders felt the impact of the mortgage market on tumbling house prices. Commercial activity also slowed further, with the index slipping to 38.2, down from 41.1 in June.

Recent job cuts in the sector were reflected in the fastest rate of contraction in employment since the series began in 1997. The employment index fell to 45.6, down from 47.8 in June.The index of new orders also slumped.

The index of activity in private service companies, which range from banks to cafés and account for nearly a third of the economy, are expected to fall to a record low today.

Economists forecast that the services PMI survey will drop to 46.7, down from 47.1 in June, the lowest reading since October 2001. George Buckley, chief UK economist at Deutsche Bank, said: “The PMI surveys tell us what is happening in nearly 60 per cent of the economy, and so more gloomy figures on services raises the risk that we are going into a recession.”

Howard Archer of Global Insight, the economic consultancy, said that he had revised down his forecast and now expected a mild recession, or two quarters of negative growth, in the second half of this year. But a leading economic group said that the slowdown in housebuilding could force prices to jump again in 2010 as demand outstripped supply. The Centre for Economic and Business Research (CEBR) said that a halt in housebuilding amid the credit crunch could fuel a 30 per cent rise in prices between late 2009 and 2012. It expects house completions to fall by a fifth this year and by 10 per cent in 2009 as builders put the brakes on construction.

The manufacturing sector shrank at its fastest rate since the end of 1998 in July, according to figures published last week.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts