Service sector shrinks at record pace

By Christina Fincher

LONDON (Reuters) - The dominant services sector shrank in November at its fastest pace since the series began in 1996 as new business, employment and confidence fell at record rates, a survey showed on Wednesday.

Coming hard on the heels of grim manufacturing and construction data earlier this week, the report boosted expectations the Bank of England will slash interest rates by a full percentage point on Thursday, knocking the pound.

The Chartered Institute of Purchasing and Supply/Markit purchasing managers' index for the sector fell to 40.1 last month from 42.4 in October. That was below the consensus forecast of 41.2 and marked the seventh month below the growth threshold of 50.

"I think a combination of much weaker activity and some early hints at deflation will give the Bank of England confidence they can cut rates more aggressively," said Ross Walker at RBS.

The services sector spans businesses from cafes to banks, and makes up three quarters of British economic output. It has been in the front line of fire as a global shortage of capital has forced banks to rein in lending.

Britain's economy contracted in the third quarter for the first time since the recession of the early 1990s and surveys suggest the final three months of the year will be just as bad, if not worse.

"Combined with the appalling numbers for manufacturing and construction, the survey confirms that recession is now snowballing and heading into deeper territory as 2008 draws to a close," said Paul Smith, senior economist at Markit Economics.

CONFIDENCE CRUMBLED