Chambers of Commerce says services sector growth is slowing

Business leaders today called for cuts in both taxes and interest rates as a survey showed that growth in the dominant services sector had slowed "markedly".

The Government must slash the burden of taxation and regulation that is crimping firms' abilities to survive the slowdown, the British Chambers of Commerce (BCC) said.

In its quarterly economic survey, the BCC said the economic recovery was "mediocre" and warned that this week's third-quarter growth figures could disappoint hopes of a sharp rebound. David Kern, its economic adviser, said: "One worrying feature is that there has been a distinct worsening in the performance of the services sector across most areas."

It said the sector, which makes up two thirds of the economy, saw growth in sales, exports and employment all suffer over the three months to September. "The recovery remains mediocre, it lacks vigour," Mr Kern said. "The bounce back that people expected at the start of the year has tailed off."

He said the latest inflation figures, showing goods prices falling at an annual rate of 0.9 per cent in September, highlighted the risk of deflation. "I don't think there's an urgent need to cut rates but the Monetary Policy Committee must be ready to cut rates if the risks of deflation do worsen," he said.

The BCC criticised Gordon Brown's plans to raise national insurance contributions for workers and employers from April. It said the increase would act as a tax on jobs by adding to employment costs at a time when businesses' profit margins were under intense pressure. Mr Kern added: "It is not good news and the timing was pretty bad if what we are seeing in the service sector is the start of a downturn."

But a separate report today, from the Ernst & Young ITEM Club, said there was a "good chance" of further tax rises in April. It said it expected the public finances to show a £7bn shortfall compared with the Government's forecasts. Official figures on Friday showed the deficit for the first half of the fiscal year was £12.4bn, already £10bn more than at the same time a year ago.

Meanwhile, the Confederation of British Industry said there was no sign of pay pressure in the manufacturing sector. Pay awards averaged 2.6 per cent in the three months to September, compared with 2.7 per cent in the previous quarter and 2.8 per cent a year earlier. Ian McCafferty, its chief economic adviser, said: "The expected pick-up in the economy has not materialised and pay rises are reflecting fears that the downturn could get worse."