Markit’s Purchasing Managers’ Index (PMI) for the sector fell from 55.4 in July to 51.1 in August. A rate of below 50 indicates declining activity.
The statistics follow last week’s European Commission report that showed business confidence at its lowest since the measures began in 1997.
Economists expected the figure to fall to 54.3, and the surprisingly large drop has been blamed on the uncertain economic outlook.
“There can be little doubt that the underlying growth profile of the sector has weakened in recent months,” said market economist Paul Smith,
More broadly, weak manufacturing and construction data point to a wider slowdown, with the composite output index of all three sectors falling to a 26-month low.
“With the economic climate so uncertain, this continues to impact on confidence, while job losses were again reported as firms remain reluctant to hire,” explained Smith.
Noble suggests London’s firms have reason to hope for an upturn, though. “With the impact of the 2012 Olympics, there are perhaps better times to look forward to,” he said.
But analysts suggest the Olympics are too far off for the Bank of England to rely on, and other measures may be taken in an effort to boost growth. “We now believe that the MPC is likely to restart quantitative easing, most likely at either this week’s meeting or the October one,” says Citi’s Michael Saunders.
From its programme of asset purchases begun around two and a half years ago, the Bank of England is sitting on roughly £32bn in profit, Matthew Russell from M&G investments estimated yesterday. Yet if the Bank tried to realise its profits, the 10 year yield would rise, Russell said.