And the falling level of activity has led to job losses for the first time in the 30-month history of the survey by the Chartered Institute of Purchasing and Supply (CIPS).

Jobs are now being lost in the service sector

The December figures, coming after months of contraction in the manufacturing sector, means that business activity is now falling across the whole of the UK.

New business falls

The new business index fell for the third month in a row, with only the computing and IT sectors recording significant growth in demand for their services. The hotel, catering and personal service sectors experienced the steepest declines.

Strong price competition also meant that only 4% of firms were able to raise prices in the month, as average prices fell by the biggest amount since July 1996.

But the easing of skill shortages meant that the cost of labour, a big portion of total costs for many service sector firms, declined.

And the fall in staffing levels was another reflection of the firm's desire to cut costs.

Light at the end of the tunnel?

Firms were slightly more optimistic about business conditions in 1999, with an increasing number believing that the economic situation would improve in the second half of the year. Lower bank base rates and the recovery in the world's stock markets were the main reasons for the increased confidence.