Danger signal as UK services optimism plunges

 Shadow Chancellor Ed Balls said the Government was playing a "dangerous game" by launching an assault on public services. 

The latest trends report by consultants BDO said the optimism index fell to 92 from 94.8 in December, signalling trouble in late Spring. "There remains a real risk that the UK could enter a technical recession," it said.

The service sector index accounting for 55pc of output saw the second largest fall on record, dropping to 88.4. "This could spell danger. Any rise in interest rates would derail the UK economy in its current fragile state. It may be that the Bank of England has to consider putting QE [money printing] back on the table as we go through the year," it said.

"The marked decline in optimism is attributed to elevated inflation, weak earnings growth and the erosion of households' real disposable income. This is set against the backdrop of public sector cutbacks," it said.

The findings will further inflame the debate over the pace of fiscal tightening. Shadow Chancellor Ed Balls said the Government was playing a "dangerous game" by launching an assault on public services. "The cuts are too deep, too fast, putting the recovery at risk," he told the BBC.

Yet the Government may not have much room for manoeuvre given the fiscal deficit inherited from Labour and the harsh mood of global bond vigilantes, even if the gilts market has been well-behaved so far. "If someone says it's not as bad as all that, they just don't realize the calamitous position we are in," Ken Clarke, the Justice Secretary, said yesterday.

BDO's output index rose just above the break-even point for expansion to 95.5, led by manufacturing. While industry has been buoyant, growth barely kept pace with the rise in eurozone factories. Sterling's devaluation has so far failed to bring about the step-change in Britain's manufacturing companies that the many economists had expected, hinting at deep structural flaws in the British economy.

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