Britain's economy looks to be heading for its first recession since the financial crisis, as growth in the important services sector slows.

The closely watched IHS Markit/CIPS UK Services Purchasing Managers' Index (PMI) fell to 50.6 in August.

Anything above 50 indicates growth, but the latest reading is a drop from July's 51.4.

The survey also revealed that business optimism is at its lowest level for more than three years.

The services sector is the largest part of the UK economy, forming about 80% of GDP, according to the Office for National Statistics.


Last month, it was revealed that GDP contracted by 0.2% in the second quarter.

If it were to shrink again in the third quarter, the UK would officially be in a recession.

That prospect is now likely, according to IHS Markit, which forecast a contraction in the third quarter (July to September) at a quarterly rate of 0.1%.

IHS Markit's chief business economist Chris Williamson said: "After surveys indicated that both manufacturing and construction remained in deep downturns in August, the lack of any meaningful growth in the service sector raises the likelihood that the UK economy is slipping into recession.

"While the current downturn remains only mild overall, the summer's malaise could intensify as we move into autumn.

"Overall jobs growth has meanwhile also ground to a halt as worries about deteriorating order books and the gloomier outlook took their toll on firms' appetite to hire, pointing to a weakening labour market and adding to the darkening outlook."

Others were more optimistic.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the chances of a second consecutive drop in GDP are "remote".

He said PMIs are "excessively influenced by business sentiment" and that inventories will boost GDP growth in the third quarter.

"Note too that they exclude the retail and government sectors, which still are growing," he said, adding an expectation for a 0.4% rise in GDP for the third quarter "provided a no-deal is averted".

On Monday the PMI for the manufacturing sector showed growth at its weakest for more than seven years.

The bad news continued on Tuesday, with news that the construction sector suffered the sharpest drop in new orders since the worst of the financial crisis.

Elsewhere in Europe, there were good PMIs for Germany and France. Service activity in France grew at the strongest pace in nine months and Germany's services sector also grew.

PMIs are seen by some economists as overstating upturns and downturns, but they are seen by the Bank of England as indicators of the wider economy.