British Chambers of Commerce today highlights �serious risks� of UK recession, as its latest survey reveals a �menacing deterioration� in both the service and manufacturing sectors

British Chambers of Commerce today highlights "serious risks" of UK recession, as its latest survey reveals a "menacing deterioration" in prospects in both the service and manufacturing sectors and particularly tough times for service companies in Scotland.

Its latest quarterly survey finds the Scottish service sector in even worse shape than that UK-wide, with employment, orders and confidence falling fast. The survey also shows tumbling domestic orders for Scottish manufacturers.

Fears over the momentum of the UK economy had, even before the British Chambers survey, been fuelled yesterday by official data showing that UK industrial production tumbled 0.8% month-on-month during May, with the manufacturing output component dropping 0.5%.

The City had predicted dips of just 0.1% in both industrial production and the manufacturing output element.

The fall in industrial production in May was the biggest monthly drop since October 2006. Electricity, gas and water supply dropped 5.2% in May - the biggest monthly fall since October 2001.

Following bleak surveys of the manufacturing, service and construction sectors last week from the Chartered Institute of Purchasing and Supply, yesterday's industrial production data from the Office for National Statistics added to fears of outright UK recession, as opposed to a slowdown in growth.

UK manufacturing output in the three months to May was down 0.2% on the December to February period. Wider industrial production, which takes in mining and quarrying, oil and gas extraction, and electricity, gas and water supply as well as manufacturing output, was down 0.5% on this three-month-on-three-month comparison.

Paul Dales, UK economist at London-based consultancy Capital Economics, said of yesterday's data: "With the surveys already pointing to a further weakening in manufacturing activity, the industrial sector is likely to continue to add to, rather than offset, the weakness in other areas of the economy. We continue to think that overall GDP (gross domestic product) growth will slow to just 0.5% next year with a better-than-evens chance of an outright recession."

Howard Archer, chief UK economist at consultancy Global Insight, said: "The bad news on the UK economy is coming thick and fast at the moment, and the downturn appears to be deepening appreciably. With industrial production contracting 0.5% on a three-month-on-three-month basis in May and the service sector slowing markedly, we suspect that GDP growth will have been limited to 0.2% quarter-on-quarter in the second quarter. Furthermore, the third quarter could be weaker still."

The UK economy grew by just 0.3% in the first quarter, having expanded by 3.0% in 2007. British Chambers of Commerce, publishing its latest survey today and describing the findings as "ominous", declares: "If these trends continue, the UK business sector is now only one quarter away from technical recession. In particular, the critical UK domestic balances for home sales and orders recorded negative growth in the last three months in both manufacturing and services."

It issues a plea to the Bank of England's Monetary Policy Committee not to raise benchmark UK interest rates. It even urges the MPC to consider further reductions in spite of the dire inflation data which have prompted financial markets to price in increases.

The committee cut UK base rates from 5.75% to 5% between December and April. There were in late April high hopes of a further reduction in May or June but these have been shattered since by the fast-deteriorating inflation picture. The City expects the MPC to hold UK base rates at 5% when it ends its next monthly meeting at noon on Thursday.

British Chambers of Commerce's survey, covering the second quarter of this year, points to the weakest trend in domestic sales and orders, and poorest employment expectations and confidence in the UK service sector since the recession of the early 1990s. It describes a sharp fall in confidence in both manufacturing and services as a "very worrying development".

The survey from British Chambers shows tumbling domestic orders for Scottish service companies, which cut staff numbers in the second quarter and expect to do so again in the current three months. It also shows a sharp drop in confidence and a fast-deteriorating cash-flow position in the Scottish service sector.

British Chambers says: "The (Scottish) service sector saw a negative quarter, underperforming the wider UK service sector. Domestic sales and orders continued to decline for the third successive quarter. Employment growth and expectations went into reverse with negative balances...Cashflow stalled this quarter and confidence across both measures (turnover and profitability) was well into negative territory."

Its survey also signals a much steeper fall in manufacturers' domestic orders in Scotland than UK-wide in the second quarter, after a solid rise in the preceding three months.

Scottish manufacturers' export business improved. However, they expect to shed staff in the current quarter and their confidence about future profitability fell sharply in the three months to June.

David Kern, economic adviser to British Chambers, said: "The Q2 results signal a menacing deterioration in UK prospects. We are now facing serious risks of recession. For the first time in many years, the vital results for domestic sales and orders, and for cashflow, have moved into negative territory for both manufacturing and services. The outlook is grim, and we believe that the correction period is likely to be longer and nastier than anticipated.

"Some key results, mostly in services, are at historically low levels not seen since the recession of the early-1990s. The threats facing the economy will be exacerbated by plunging confidence across both sectors. Overall, the Q2 results point to growing risks of outright falls in UK output in at least one or two quarters."

He added: "The MPC faces difficult choices. But immediate threats to growth are more alarming than dangers of higher inflation. The sharp deterioration in the cashflow balances of both sectors to record lows heightens threats of a serious credit crunch. An increase in (interest) rates at the present time would weaken further the banking sector, and would endanger the smooth flow of finance to business.

"A major recession can still be avoided, but forceful measures are needed to improve confidence. The MPC must resist misguided calls for higher interest rates. Indeed, if wage pressures remain muted, the option of early interest rate cuts must be considered."

David Frost, director-general of the British Chambers, said: "These results show a real risk of recession in the coming months. This is obviously deeply worrying, not just for business but for the consumer too, with both manufacturing and services reporting negative results. The temptation for the government will be to raise business taxes in the next PBR because the Exchequer is running out of money. This would be a catastrophe."