Slump in services output adds to misery

Consumers have reduced spending sharply due to rising prices, higher taxes and fears of government cuts, and the Bank of England has warned of more tough years ahead.

The central bank is expected to keep interest rates at a record low 0.5 per cent until well into next year despite inflation at more than twice its target, as it tries to support a recovery that is struggling to gain traction.

Services output contracted by 1.2 per cent in April after a 0.8 per cent increase in March, driven by a sharp fall in wholesale activity, the Office for National Statistics said yesterday.

The fall was the biggest since January 2010, when heavy snow caused disruption.

“It should be noted that April 2011 was an unusual month for a number of reasons,” the ONS said, citing the effect of the royal wedding and the extra public holiday to mark it.

The services sector slump adds to a 1.7 per cent drop in industrial output in April, and further doused hopes of faster growth in the second quarter after the economy stagnated over the six months following September 2010.

Separate data from the Bank of England showed mortgage approvals ticked up only slightly in May.