THE economy is feared to have plunged back into the red after figures suggested the services sector shrank last month for the first time in two years.
The Markit/CIPS purchasing managers index (PMI) survey showed a reading of 48.9 in December, down from 50.2 in November and below the 50 mark separating growth from contraction.
The result marked the first dip in the services sector since a snow-related decline in December 2010 and comes after disappointing construction figures yesterday. It has raised fears of yet another recession. Experts said the decline for the services sector, which makes up around 75 per cent of total output, gives a clear signal that the economy went back into reverse in the final quarter of 2012.
Manufacturing was the only bright spot last month with activity surging to a 15-month high in December, according to surveys, but the sector only accounts for 10 per cent of the economy.
Chris Williamson, chief economist at Markit, said the service sector blow raises the likelihood that the UK economy is sliding back into recession.
The UK would have to suffer two consecutive quarters in a row of declining output to be officially declared back in recession.
But Mr Williamson said the outlook for the first quarter of 2013 is also gloomy.
Bad weather is likely to have played a role in dampening service sector activity in December, but the fact that incoming new business dropped for a second successive month suggests that underlying demand remains very weak and that activity may continue to fall in the new year, he said.
Today's survey does not cover the retail sector, but there is little confidence that consumer spending over Christmas was enough to offset woes in the services and construction sectors, given cost pressures on UK households.
The first official estimate of fourth quarter GDP will be released on January 25, although consumer spending figures will not be included until the second estimate.