The UK economy is on course to shrink between July and September and could tip into recession, a closely-watched survey suggests.
The S&P Global/CIPS UK Purchasing Managers' Index (PMI) found that rising interest rates and weaker household spending led to a sharp drop in demand for goods and services in August.
The index looks at key economic measures such as orders and employment.
It showed that activity shrank in August after six months of growth.
The index's reading of 47.9 this month - anything below 50 marks a contraction - is the lowest level in two and half years.
On the upside, economists said that the PMI figures, which measure the health of an economy, showed that the Bank of England's efforts to tame inflation were beginning to work.
Pound falls
Following the release of the PMI report, the pound fell against the dollar and City analysts lowered their expectations of where the interest rate would peak to 5.5% from 6%.
The interest rate currently stands at 5.25% following a succession of increases since late 2021 when it was close to zero.
However, Chris Williamson, chief business economist at S&P Global Market Intelligence, told the BBC that the figures also suggested "the fight against inflation is carrying a heavy cost in terms of heightened recession risks".
"A renewed contraction of the economy already looks inevitable, as an increasingly-severe manufacturing downturn is accompanied by a further faltering of the service sector's spring revival," he added.
According to official figures, UK inflation was 6.8% in July which, although slower than the previous month, is still more than three times higher than the Bank of England's 2% target.
Interest rate
The Bank's Monetary Policy Committee has voted 14 times in a row to raise the interest rate. The theory is that, by making it more expensive to borrow money, consumer demand will cool and price rises will slow.
However, repeated interest rate rises tend to drag on economic growth as it becomes more expensive for consumers and businesses to borrow and spend. Companies may also cut back on investment and jobs.