British manufacturing is shrinking at its fastest rate in a decade and the number of companies going to the wall has shot up dramatically, two reports showed on Friday, raising fears the economy may soon be in recession.

Bellwether department store chain John Lewis added to the gloom. Sales in the week to July 26 were 4.5 per cent lower than in the same period a year earlier as consumers grappling with the soaring cost of living cut back on non-essentials.

Higher inflation also means not one analyst polled by Reuters expects the Bank of England to cut interest rates to boost the economy next week. Rising gas bills could soon push inflation to more than double the central bank's target.

"The risk of a few quarters of declining GDP (gross domestic product) continue to rise," said Matthew Sharratt. "We still believe the UK is more likely to virtually stagnate than fall into outright recession though, particularly if the recent plunge in oil prices - which has not yet been captured by survey data - is maintained."

The manufacturing sector may already be in recession.

The purchasing managers' survey in July fell to its lowest since December 1998 when the global economy was reeling from the emerging markets crisis.

At the same time, the manufacturing survey showed firms are facing a record rise in costs thanks to the price of oil. Export orders also fell, even though the sterling has been weaker.

Faced with higher energy bills and funding costs, more companies across the economy in England and Wales are going into liquidation. Government figures showed company insolvencies in the three months to June shot up 15 per cent on the year. "For some corporates, it is a triple cocktail: Higher commodity costs, higher interest costs, and reduced demand from consumers. It's more than some can cope with," said David Winfield, head of Freshfields's banking practice.

Battered by a global credit crunch for a year now, British banks are also now having to make provision for bad debts, particularly as falling house prices have raised the prospect of more than a million people falling into negative equity.