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Poor growth sparks fear of double-dip UK recession

The risk that the economy may undergo a further contraction and a "double dip" recession was underlined with the release of further evidence suggesting that the economy is slowing down.

A fall in service sector activity in June - comprising around 70% of the economy - subdued mortgage approvals and depressed consumer confidence point to third quarter economic growth well below that seen so far this year. The figure will be published on October 26.

The data arrived as the Bank of England's Monetary Policy Committee prepares to meet next week, and the Treasury enters the last stages of the Spending Review, to be unveiled on October 20, which may further dent business and household sentiment.

Earlier this week, Adam Posen, an American economist serving on the MPC, issued a stark warning of a "lost decade" for the British economy unless the bank steps up its programme of "quantitative easing", or QE, which has so far injected £200bn directly into the economy.

The Office for National Statistics said that activity in the service sector contracted by 0.2%. Improvements in the restaurant trade, retailing and wholesale distribution were more than offset by falls in haulage and air travel.

The extreme weakness in the economy this time last year, however, means output is still up by 1.2% on July 2009, the sixth consecutive month of improvement.

But the fragile condition of consumer confidence, set back by the emergency Budget in June and battered by talk of savage public spending cuts and job losses since, is highlighted in the latest barometer readings from NOP/GfK.

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Their Consumer Confidence Index decreased by two points in September to minus-20, meaning that a net 20% of households believe that their personal financial situation will deteriorate over the next year.

This loss of confidence is feeding through to the housing market, where the shortage of mortgage finance in the credit crunch has been joined by a decreasing demand for loans from increasingly nervous individuals.

Thus the Bank of England reported new mortgage approvals of 47,372 in August, a touch lower than July and broadly in line with expectations - but not much more than half the activity that would underpin a healthy market.