The economic outlook darkened further after upmarket retailer John Lewis reported an overall 8.3 per cent slump in sales last week and a survey showed the services sector contracting at the fastest rate for at least 12 years.
Economic commentators, however, said the figures would even greater pressure on the Bank of England to cut interest rates next week.
John Lewis’s West Midland flagship outlet in Solihull saw sales fall by 15.1 per cent compared with the same week last year.
The company said all but one of its department stores that have been open for more than a year posted losses. The worst performer was an outlet at Bristol that posted decline of 24.6 per cent.
The employee-owned company, a reliable barometer of the retail sector, also said sales at its Waitrose supermarkets chain fell by 0.7 per cent.
The trading figures for the week to September 27 followed a 5.6 per cent drop in department store sales the week before. Receipts for the week totalled £48.72 million compared with £53.14 million in the same week in 2007.
“A combination of unseasonably sunny, warm weather and a huge amount of coverage of the global economic situation added together to give a very tough trading week,” the employee-owned group said of its department stores.
Pali International analyst Nick Bubb said that, stripping out the impact of new stores, the figures equated to a 14 per cent drop in like-for-like sales at the department stores and a four per cent decline at Waitrose.
“A truly awful number and provides further support for the idea that trading recently hit a brick wall across the industry,” Kaupthing analysts said in a research note.
The Chartered Institute of Purchasing and Supply/Markit purchasing managers’ index for services companies fell to 46.0 last month from 49.2 in August, the worst reading since records began 12 years ago, as new business crumbled, confidence fell and the pace of job-shedding increased.
Paul Smith, senior economist at Markit Economics, said: “Following on from the shocking manufacturing figures and a further considerable reduction in construction sector output for September, the services data provide more evidence of rapidly deteriorating activity in the real economy.”
Housing equity withdrawals figures from the BoE provided a further sign of an economy turning down.
The central bank said housing equity withdrawals turned negative in the second quarter for the first time in a decade, as households repaid a net £2.8 billion.
Rising house prices in recent years encouraged homeowners to refinance their loans to free up cash for other purposes. The drying up of this source of cash could hinder an already-struggling consumer sector.
After dismal manufacturing and construction data earlier this week, and the worst quarterly sales performance from retailer Marks & Spencer for over three years on Thursday, the figures suggest that Britain’s economy is dangerously close to recession.
They are also likely to reinforce expectations the Bank of England will cut interest rates next week.
“The sharp decline in service sector activity in September leaves little doubt that the economy contracted in the third quarter and is on its way into recession,” said Global Insight economist Howard Archer.
He expects a the Bank of England rate to be cut by 25 basis points to 4.75 per cent next week, and does not rule out a 50-basis-point reduction. Sterling trimmed earlier gains against the US dollar as speculation of a rate cut mounted.
Expectations were heightened further when BoE policymaker David Blanchflower, well-known for his dovish views on monetary policy, said that he would vote for a reduction in interest rates. He backed a 50-basis-point cut last month.
There was further bad news from the high street when Blacks Leisure, the outdoor clothing and footwear retailer, issued its third profit warning this year, blaming poor sales during an unseasonably wet August.