Data points to weaker UK economy

The service sector is feeling the effect of the consumer slowdown

The UK service sector - which accounts for three-quarters of the economy - shrank for the third month running in July, according to a survey.

The Chartered Institute for Purchasing and Supply said its index of service sector activity was 47.4 in July.

While this was better than June's figure of 47.1, a figure of less than 50 indicates contraction in the sector.

Separate figures showed that UK manufacturing output fell for a fourth consecutive month in June.

Analysts said the weak service sector and manufacturing figures meant that the Bank of England's monetary policy committee was unlikely to change interest rates from 5% on Thursday.

"I think they should be sitting on their hands this month," said George Buckley at Deutsche Bank.

Growth shaved

Manufacturing output fell 0.5% on the previous month and 1.3% over the year with widespread declines in most sectors, official data showed.

It was the fourth consecutive month of declines in manufacturing output, and biggest annual fall in manufacturing output since December 2005, when it fell by 1.9%.

The Office for National Statistics (ONS) said the figures would take 0.06 percentage points off the estimate for UK economic growth in the second quarter of 2008, which was initially predicted at 0.2%.

The figures come a day after the regional trends survey from the CBI and Experian suggested that the bulk of manufacturers across the country expect production to fall in the next three months.

'Little respite'

Referring to the ONS data, analyst Philip Shaw at Investec said the latest manufacturing figures were "very disappointing".

"Together with back revisions, they suggest there is a chance that Q2 GDP could be revised down from an already weak pace of activity."

He added: "There seems to be a little respite for the service sector with the overall business activity index bouncing back unexpectedly but it remains in weak territory and certainly in our view does not mark a turning point in the sector's fortunes."

'Difficult times ahead'

In the service sector, business confidence fell to its lowest level since the survey began, outstanding business contracted for a 10th month running, and employers cut their staff numbers.

Paul Smith, senior economist at Markit Economics, which compiles the survey, said: "The record contraction in new business, severe cost pressures and deteriorating sentiment all point to the continuation of difficult times ahead."

The July survey showed input cost inflation easing from its record peak, but it was still the second highest figure on record.

The prices charged index was little changed at 55.9 from 56.0.