Page last updated at 15:19 GMT, Wednesday, 4 June 2008 16:19 UK

Grim picture of UK service sector

London cafe
Restaurants are suffering from a consumer slowdown and high bills

Britain's service sector shrank in May for the first time in five years, as costs rose and confidence in business prospects fell, a survey has shown.

The Chartered Institute for Purchasing and Supply's index of service sector activity fell to 49.8, from 50.4 in April, the first fall since March 2003.

A figure of less than 50 indicates contraction.

But high inflation means there is little chance of relief from a UK interest rate cut later this week.

"The activity data is crying out for rate cuts, but the inflation story is preventing that happening," said Brian Hilliard, chief UK economist at Societe Generale.

"Everything is pointing to a sharp and painful economic slowdown," he added.

Slowdown evident

UK service providers, which make up about three-quarters of the UK economy, suggested that jobs were cut at the fastest rate in the survey's 12-year history, as workloads waned.

Meanwhile, business confidence declined to its lowest ebb since October 2001.

Earlier, a separate report from the Nationwide building society showed a slowdown in consumer confidence.

These reports add to the dismal news on the housing market, where prices continue to slip while the slowdown of new mortgages being approved continues.

Sterling fell against other major currencies and UK government bonds edged up after the service sector survey.

No change for rates?

But analysts said that with consumer inflation at 3% - its highest level for 13 years - markets were not pricing in a rate cut after the Bank of England's meeting on Thursday.

Higher living costs, including energy bills, are evident in the strength of the price component of the survey, which jumped to 67.7 from 67.3, the biggest jump since the survey began in July 1996.

The Organisation for Economic Co-operation and Development cut its forecast for UK economic growth in 2008 to 1.8% and to 1.4% in 2009.

This is much more pessimistic than Chancellor Alistair Darling's view that the UK economy will grow by between 1.75% and 2.25% in 2008 and by 2.25% to 2.75% in 2009.

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