Fears that Britain is sliding into a deflationary slump will intensify today as a key survey shows collapsing activity in the services sector, the engine room of the economy.

Rapidly worsening conditions among services businesses in the past three months are exposed by the quarterly survey from the CBI. It reveals that plummeting sales, orders, and profits across the sector are fuelling its worst job cuts in more than ten years.

The grim findings come after official GDP data yesterday emphasised the alarming scale and pace of Britain's plunge into recession, which is now shown as even sharper than previously believed.

The economy is estimated to have shrunk by a steep 0.7 per cent in the third quarter of last year, compared with the 0.5 decline initially reported. That was followed by an unrevised 1.5 per cent slump in the final quarter (Q4) that was the sharpest quarterly drop since 1980. The combined toll wiped 2.2 per cent off national output over the second half of last year, in a far faster rate of decline than that suffered in the last recession in the early Nineties.

The economy's growth for last year as a whole was also revised down to just 0.7 per cent, drastically weaker than the 3 per cent expansion of 2007, and its worst showing since 1992.

David Blanchflower, the most doveish member of the Bank of England's rate-setting Monetary Policy Committee, gave warning last night that the risks of a protracted recession are clearly evident. He urged the Government to take more radical action to jump-start growth.

Professor Blanchflower, who is due to step down from the MPC at the end of May, called for Britain to mimic the US fiscal stimulus of tax cuts and extra public spending put in place by President Obama. A British stimulus should cost £90 billion, and be aimed at creating 750,000 jobs, he said.

Frailty in virtually every part of the economy was laid bare by the detailed breakdowns in yesterday's GDP data. Consumer spending tumbled for a third quarter in a row and at the sharpest rate since 1990, falling by 0.7 per cent in Q4 as recession undercut Britons' earnings and spending power.

Pay grew by a meagre 0.1 per cent in the quarter, registering its smallest gain for more than 14 years.

After factoring in inflation, earnings fell in real terms by 0.2 per cent in Q4, in a trend that economists said implied that consumer demand would sink yet further in the coming months.

Businesses also resorted to severe spending cuts, leaving capital investment across the economy down by 2.3 per cent in Q4, and down by 9.7 per cent from a year earlier, in its worst annual drop for a quarter of a century. Companies also pushed through huge cuts in stocks, running down inventories worth some £2.7 billion.

Economists said that despite aggressive efforts by the Treasury and the Bank of England to shore up the economy and imminent moves by the Bank to try to rekindle growth by “printing money”, the dangers of an even deeper slump and a bout of destructive deflation were still mounting.

Professor Blanchflower said that the Bank must consider the risks of prolonged recession, of more unexpected shocks to the economy, of a further downward lurch in house prices and of deflation. He challenged the use of the consumer price index — which excludes housing costs — as the Bank's inflation benchmark and suggested that its use could add to the threat of deflation taking hold. In a tilt at his MPC colleagues he added: “Clearly, policymakers did not come to a realisation of the problems in the financial sector quickly enough.”

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive