Falling sales in a weak domestic market have left British firms facing their worst cashflow situation since records began in 1992, a survey from the British Chamber of Commerce showed today.
The survey of nearly 5,000 businesses highlighted a sharp deterioration in conditions over the past three months as damage from the credit crunch spread beyond the banking sector and into the real economy.
The downturn was particularly evident in the service sector where confidence, hiring intentions, sales and orders all fell to their lowest level since the early 1990s.
"These results show a real risk of recession in the coming months," said David Frost, director general of the BCC.
He said the British economy was likely to grow by 1.25 per cent this year as a whole, but two quarters of contraction - the technical definition of recession - was a possibility.
Sterling edged lower versus a broadly firm dollar in response to the report.
"It (the data) increases the likelihood of an interest rate cut being the next move and it coming a bit sooner than people previously thought," said Paul Robinson, chief sterling strategist at Barclays Capital.
The survey showed the domestic sales balance for the service sector tumbled to -2 in the second quarter, its weakest reading since 1992, from +17 in the first.
The manufacturing domestic sales balance fell to -3, its weakest since the fourth quarter of 2001, from +12 in the first. The only bright spot was the export market where sales and orders rose, aided by the pound's recent fall on the foreign exchanges.
Cashflow balances for both services and manufacturing sector fell to their lowest level since the series began in 1992.
Kern said there was no sign yet that banks were turning off the taps to business, but that was clearly a risk. Banks were already tightening their lending terms.
"The British Chambers of Commerce survey for the second quarter of 2008 makes pretty dismal reading all round, adding to the evidence that the economic downturn is deepening," said Howard Archer at Global Insight.
"Indeed, the survey heightens fears that recession is an ever growing likelihood."
Agencies