The latest data on the UK’s manufacturing and services sectors provide the clearest signal yet that GDP has contracted in Q3.

The fall in the manufacturing index according to a recent survey from 45.9 in August to 41 per cent left it at its lowest level since January 1992. At this level, the survey is roughly consistent with the official measure of manufacturing output falling by a whopping seven per cent per annum compared to August’s -1.4 per cent.

Perhaps, more worrying was the further weakening in the official measure of services output given that the services sector makes up 75 per cent of overall GDP. In the three months to July, services output was flat compared to the 0.2 per cent rise in Q2. If services output were flat in August and September, this would be enough to reduce Q2 GDP growth from 0.0 per cent to at least -0.1 per cent in Q3. Overall, these figures bring the UK economy much closer to recession, said Capital Economics Ltd. “We continue to think that GDP will fall by 0.2 per cent next year,” the CEL added.

Meanwhile, profitability and business volumes in the UK financial services sector have fallen at record rates as the industry continues to be battered by the credit crunch, a survey carried out by Confederation of British Industries (CBI) said.

Business was lower across all customer bases, particularly financial institutions and individuals. Meanwhile incomes fell heavily, and the cost of credit increased for a third consecutive quarter.

Job losses continued, but are set to rise sharply over the coming three months. And 99 per cent of firms think that it will take more than six months for “normal” market conditions to return.

Asked how their business volumes had fared in the three months to early September, 10 per cent of firms said they had risen, while 61 per cent said they had dropped. The resulting balance of -51 per cent was much worse than expected, and was the weakest result since the survey started in December 1989. Volumes are expected to fall again over the coming three months, but at a slower rate (-31 per cent).

Profitability in the sector declined at a record rate as a balance of 49 per cent of firms reported a fall, and this rate is set to continue over the next three months.

The value of fee, commission and premium incomes fell over the last three months, as did income from net interest, investment or trading. All have been falling for a year and dropped more heavily than in June’s survey. Slightly more moderate falls are expected in the coming quarter.

Business sentiment fell sharply again, as a balance of 59 per cent said they are less optimistic about the overall business situation in the financial services sector than they were in June.

The volume of business shrank across all customer bases, but was most marked with financial institutions (a balance of -46 per cent) and private individuals (-41 per cent), where further contractions are expected over the coming three months.

Total operating cost growth stabilised (a balance of +3 per cent) and a drop is now expected over the coming three months. Average operating costs remained flat, as expected.

In an indication that credit continues to become more expensive, average spreads, which mark the difference between the rates at which money is borrowed and lent, widened for a third quarter running, although a gentler increase is predicted in the next three months. A balance of 19 per cent of firms reported an increase in the value of non-performing loans, or bad debt, and 24 per cent expect a rise in the coming quarter, in what is becoming a steadily rising trend.

Numbers employed in the sector fell (a balance of -16 per cent) but a significantly bigger reduction is expected over the three months ahead (-44 per cent).

Capital expenditure in real estate and machinery is expected to be lower in the next 12 months than in the past year. Drops in IT investment and marketing expenditure are also predicted, as firms cut back to save costs and readjust for lower demand.

Firms cited the level of demand and strength of competition as the factors most likely to limit business expansion over the next year. However, all the factors cited were below their long-run averages, except the ability to raise funds. This was above its long-run average for the fifth quarter in a row.

Supplementary questions about the credit crunch, which have now been asked for a fourth successive survey, showed that virtually all financial services firms (99 per cent) expect it to be more than six months before “normal” financial market conditions resume. Asked about the impacts of the credit crunch, firms said that reduced sales or revenue growth was the greatest concern across both the short and medium terms.

Banks saw the negative trend in their profitability accelerate during the past three months, as the decline in the volume of business outweighed the effect of higher spreads between lending and borrowing. Business with domestic customers was below normal to the greatest extent since December 1991. Numbers employed were stable, but look set for a big fall in the next quarter.

Building societies saw profitability decline at a record rate over the last three months, on the back of lower business volumes, fee and commission income, and the first fall in spreads for a year. Numbers employed were flat, as predicted, but are set to fall heavily for the second time this year in the coming quarter.

Life insurers saw another steep fall in both new and total business volumes over the three months to September, as well as declines in income from premiums, investment and trading. This outweighed the further increase in spreads, with profitability falling - but more slowly than in the prior quarter. Numbers employed fell heavily, and the reduction in head count is expected to continue at the same rate next quarter.

General insurers saw their volume of business decline relatively moderately over the past three months, as well as reporting lower income values and higher total costs. Reflecting this, profitability fell for the second successive quarter. Meanwhile, general insurers plan to raise their marketing and IT investment, but not other investment, over the coming year relative to last.

In securities trading business volumes fell sharply over the last three months, completing a full year of declines. Fee and commission income and the value of interest, investment or trading income also declined for the fourth successive survey. Reflecting this, lower profitability was reported. Employment within securities trading fell back less rapidly than it did last quarter, but a steeper reduction is expected in the three months to December.

In fund management business volumes fell for all survey respondents, ending a three quarter sequence of increases. The drop in volumes was particularly pronounced with financial institutions and private individuals. Furthermore, the value of fee and commission income was down, as was net interest, investment or trading income. The sharp falls in volumes of business and value of income over the past quarter, meant that profitability fell for all respondents.