UK business activity declined further in the run-up to the election according to a closely-watched survey – adding to fears that the economy has shrunk in the fourth quarter.

The IHS Markit/CIPS flash purchasing managers’ index (PMI) reading of 48.5 – where the 50-mark separates growth from contraction – was the worst since July 2016.

The survey pointed to “a combination of domestic political uncertainty, a lack of clarity in relation to Brexit and subdued global economic conditions”.

Chris Williamson, chief business economist at IHS Markit, said: “December’s PMI data sadly lacked festive cheer, indicating that the economy contracted for the third time in the past four months.

“The latest decline was the second largest recorded over the past decade, and increases the likelihood that the economy contracted slightly in the fourth quarter as Brexit-related uncertainty intensified in the lead-up to the general election.”

Mr Williamson said a slump in overseas demand helped send new orders down for the fifth month In a row and jobs cut.

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However, optimism about the future turned higher “as firms hope that the election will bring clarity on the outlook that is holding back demand”, he added.

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The “flash” December reading – covering the week leading up to the general election – was worse than the 49.3 figure recorded for the whole of November.

It painted a worse than expected picture for both the dominant services sector and for the manufacturing sector.

Final versions of the PMI survey will be published in January.

But PMI readings have previously overstated weakness in the UK economy.

Thomas Pugh, UK economist at Capital Economics, said the survey was consistent with the economy shrinking by 0.2% in the fourth quarter.

But he added: “The PMIs won’t have captured any increase in sentiment following the election.”

A Brexit deal and more public spending could provide a boost in the new year but if the economy fails to pick up in coming months it could prompt the Bank of England to step in and cut interest rates, he added.

The UK avoided recession earlier this year when official figures showed GDP growth of 0.3% for the third quarter, having shrunk by 0.2% in the April-June period.