Doubts remain over the strength of the UK economy despite signs of a pick-up in the service sector, research carried out for employers' organisation the CBI has shown.

The study found that confidence among service sector firms had failed to improve over the past three months, even though business volumes had started to increase.

A separate survey released on Monday said the UK's sluggish growth would continue until autumn next year, while manufacturing figures hit their weakest level since July.

The latest business trends report from accountancy firm BDO Stoy Hayward said the Bank of England would need to cut rates early next year to stimulate the economy.

Confidence falling

Consumer services have seen the steady decline in their sector level out

Ian McCafferty, CBI

The CBI found that business and professional services firms - such as advertising agencies and management consultancies - had seen a pick-up in business over the past three months.

But confidence failed to improve and profits fell, although the CBI said profits were expected to start improving early next year.

In the consumer services sector - which includes hotels and restaurants - confidence "slumped significantly".

"Business services have seen a pick up in business in recent months, yet this has failed to feed through to optimism and they remain worried about the future," Ian McCafferty, CBI chief economist, said.

"Consumer services have seen the steady decline in their sector level out, yet they have become much gloomier."

Manufacturing stagnates

The manufacturing sector compounded the downbeat picture.

The Chartered Institute of Purchasing and Supply said its activity index fell to 50.0 points in November, indicating stagnation in the sector.

On the CIPS scale, a reading above 50 indicates expansion, while a score below this level denotes contraction.

The economy is looking drab and disappointing at present

Peter Hemington, BDO Stoy Hayward

The November reading is the lowest since July, as companies struggle against weak demand by cutting costs.

But CIPS director Roy Ayliffe said cheaper raw material costs had prompted a rise in demand, with the new orders index rising to 52.1 in November, against 51.3 in October.

'Drab' performance

According to the BDO report, growth will remain sluggish until autumn 2003, with the UK economy expanding at a rate of 1.2% for much of next year.

This figure compares with forecasts last week by Chancellor Gordon Brown that growth would hit 1.6% this year, and 2.5 - 3.0% next year.

The global economic slowdown was still weighing heavily on UK firms, Monday's report found.

"The economy is looking drab and disappointing at present, and the gloom is set to continue well into 2003," said Peter Hemington, a partner at BDO Stoy Hayward.

"The Bank of England had a chance to cut interest rates in October and November but was dissuaded by the soaring housing market.

"With inflation well in check, we believe it will be February or March 2003 when the MPC next takes decisive action to cut rates to boost the UK economy."