Falling sales in a weak home market have left British firms facing their worst cashflow situation since records began in 1992, a survey from the British Chamber of Commerce showed on Tuesday.
The survey of nearly 5,000 businesses highlighted a sharp deterioration in conditions over the past three months, even as prices were accelerating sharply.
This downturn was particularly evident in the service sector where confidence, hiring intentions, sales and orders have all fallen to their lowest level since the early 1990s.
"These results show a real risk of recession in the coming months," said David Frost, director general of the BCC, which is forecasting the British economy will grow by 1.25 percent this year.
The survey showed the domestic sales balance for the service sector tumbled to -2 in the second quarter, its weakest reading since 1992, from +17 in the first.
The manufacturing domestic sales balance fell to -3, its weakest since the fourth quarter of 2001, from +12 in the first.
The only bright spot was the export market where sales and orders rose, aided by the pound's recent fall on the foreign exchanges.
Cashflow balances for both services and manufacturing sector fell to their lowest level since the series began in 1992.
Kern said there was no sign yet that banks were turning off the taps to business, but that was clearly a risk. Banks were already tightening their lending terms.
There was more bad news on the inflation front with the balance of manufacturers under pressure to raise prices hitting a new all-time high of +45.
In the service sector, the balance of firms expecting to raise prices fell two points to +41, still at an uncomfortably high level.
Still, the business lobby group said the Bank of England should not even think of raising interest rates when the economy is so weak.
"With output well below capacity, the current upsurge in inflation should burn itself out," said Kern. "The business sector is one quarter away from recession but it's a battle that we have not yet lost. A lot depends on the policy response."