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Double-dip recession fears see £49bn wiped off shares

City prepares for second round of quantitative easing after sharpest slowdown in UK’s services sector in a decade

The City was readying itself for a second dose of electronic money creation from the Bank of England after the sharpest slowdown in Britain’s services sector in a decade prompted a £49bn loss in the value of leading London shares.

One leading analyst predicted that Threadneedle Street could reactivate its quantitative easing programme this week after the monthly report from purchasing managers flashed warning signs of a double-dip recession over the winter.

News that activity in the services sector – which accounts for 75% of the economy – had dropped at its fastest rate since the foot-and-mouth crisis of 2001 sent shares sharply lower. With anxiety mounting over the eurozone’s debt-ridden governments, the FTSE 100 Index closed almost 190 points lower at 5103.

Shares across Europe fell more heavily in response to weak economic figures and concerns that the political weakness of Angela Merkel’s centre-right government will blunt attempts at solving the eurozone’s debt crisis. Wall Street was closed for Labour Day.

Banks were the biggest losers in London as a further £49bn was wiped off the value of leading shares following a loss of £33bn last Friday. The part-nationalised RBS fell more than 12% after it was singled out by a broker as the most vulnerable British target of claims made by the US Federal Housing Finance Agency over the subprime mortgage scandal. Barclays and HSBC, which joined RBS on the list of 17 banks, fell 7% and 4% respectively. Lloyds Banking Group fell 7%.

Michael Saunders, economist at Citi, said the services data would have an impact on the Bank’s nine-strong monetary policy committee. “With these figures and other signs of increased downside risks to growth, we now believe that the MPC is likely to restart QE, either at this week’s meeting or the October one,” he said.

Howard Archer, UK economist at IHS Global Insight, agreed that more QE was on the way, but not yet. “The survey strongly reinforces belief that interest rates are staying down at 0.5% for a long time to come [but] we believe that further quantitative easing still seems unlikely as soon as this Thursday given still significant near-term inflation concerns.”

Labour accused the chancellor,George Osborne, of being in denial about the state of the economy. “We urgently need a plan for jobs and growth to kickstart the economy and so help get the deficit down,” said Chris Leslie, shadow Treasury minister.

“The government should start by temporarily cutting VAT and using the money raised from a tax on bank bonuses to build thousands of affordable homes and get people off the dole and into work.” © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds