Service sector shrinks at near-record pace in December

By David Milliken

LONDON (Reuters) - The service sector shrank at a near-record pace in December, the jobs climate was the worst on record and house prices slumped again, surveys showed on Tuesday, cementing forecasts for lower interest rates this week.

As the economic downturn gathers momentum, pressure is growing on the Bank of England to cut borrowing costs sharply on Thursday from 2 percent.

Policymakers have already cut rates by three percentage points since October and analysts argue official rates may have to fall near zero to stave off a deep and prolonged recession.

The Chartered Institute for Purchasing and Supply said its services PMI edged up to 40.2 last month from a record low of 40.1 in November -- still indicating severe weakness in a sector that makes up three quarters of Britain's economy.

It was also the eighth straight month of contraction, with any reading below 50 showing the sector shrinking.

"Although marginally less negative than expected, the predominant sector of the UK economy remains in serious difficulty, with few meaningful signs of any turnaround," said Ross Walker, an economist at RBS.

The services survey mirrored a small improvement in the parallel manufacturing survey last week, but both sectors are contracting fast and economists are pencilling in a one percent fall in overall GDP in the final quarter of 2008.

BLEAK OUTLOOK