U.K. Economy Faces `Serious' Recession Risks, BCC Survey Shows

By Brian Swint

July 8 (Bloomberg) -- Sales of services and manufactured goods in the U.K. fell in the second quarter, posing ``serious risks'' that the economy will tumble into a recession, the British Chambers of Commerce said.

An index based on a survey of 4,758 companies fell to minus 2, the lowest since 1992, from 17, according to the London-based lobby group. Another index tracking factories declined to minus 3 from 12, the least since the end of 2001.

``We are now facing serious risks of recession,'' David Kern, economic adviser to the BCC, said in a statement. ``The outlook is grim, and we believe that the correction period is likely to be longer and nastier than anticipated.''

Falling property prices, a dearth of credit and record oil prices are dragging down U.K. expansion to its weakest since the early 1990s. Bank of England policy makers, who meet this week, are gauging the risks to the economy from the fastest inflation in a decade, which prompted four of them to consider advocating a rate increase last month.

``The worries about a threat from a slowdown are far greater than the threat of inflation,'' said David Frost, director general of the BCC, in a Bloomberg Television interview recorded yesterday. ``Over the last three weeks there has been a dramatic decline in confidence. Almost every indicator is pointing south.''

Confidence Survey

The BCC's measure of confidence among services companies fell to the lowest level since 1998, the report showed. Expectations for employment declined to the weakest since 1998 and an indicator of cashflow slumped to the lowest since 1992, the report showed.

At the same time, the index showing manufacturers' intentions to raise prices rose to the highest level since that part of the survey began in 1997.

``In the past, companies have been unable to implement these price increases,'' Kern told reporters yesterday. ``If wages remain muted, rate cuts should come back on the agenda. It would be devastating if they put up interest rates.''

All but one of 49 economists predict the Bank of England will keep the key rate unchanged at 5 percent when policy makers meet this week. The decision will be announced on July 10.

The BCC's index shows the percentage balance of companies reporting higher sales in the last quarter against those experiencing a decline.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.