Britain's economy displayed clear recession signals on Friday, a day after the Bank of England called a halt to its long run of interest rate increases that have turned the tide on inflation but at the expense of a hit to businesses.

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A business survey, which the BoE factored into its decision to keep rates on hold, showed companies endured a much tougher September than feared, marked by growing unemployment.

The preliminary reading of the UK S&P Global Purchasing Managers' Index (PMI) for the services sector sank to its lowest since the pandemic lockdown of January 2021 and below all forecasts in a Reuters poll of economists.

Aside from during the COVID-19 pandemic, the index last fell this low during the Global Financial Crisis. Its gauge of jobs suffered its biggest fall on record outside of the pandemic.

Sterling was down about 0.4% against the U.S. dollar at 1105 GMT, a touch above its lowest since March as investors pondered how long the BoE could stick to its plan to keep interest rates around current levels before cutting them to help the economy.

PMIs for the euro zone picked up a little but still suggested a recession was approaching.

A separate survey by the Confederation of British Industry (CBI) showed factory output fell and was expected to be stagnant in the remainder of 2023.

"Bouncing along the bottom is likely to be a story which persists for the near term," Martin Beck, chief economic advisor to forecasters the EY ITEM Club, said.

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While the full impact of the BoE's 14 back-to-back rate hikes had yet to be felt and the jobs market was weakening, weaker inflation and relief that borrowing costs may have peaked suggested the economy would avoid a serious downturn, Beck said.

There was some signs of resilience among consumers alongside the weak readings of business activity.

Official data showed retail sales rose in August, partially recovering from a rain-induced plunge in July, and a measure of consumer confidence climbed to its highest since January 2022.

However, data company S&P Global said its survey was consistent with a drop in quarterly economic output of 0.4%.

"The disappointing PMI survey results for September mean a recession is looking increasingly likely in the UK," said Chris Williamson, chief business economist at S&P Global.

Samuel Tombs, an economist with Pantheon Macroeconomics, disagreed, saying wages were finally outpacing inflation, household energy prices were about to fall back further and consumer confidence levels were holding up.

"Needless to say, though, today's report further increases the chances that the BoE's tightening cycle is over," he said.

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