The UK is at serious risk of recession over the next few months, according to a survey of 5,000 small businesses by the British Chambers of Commerce.
The research found that orders and sales had slowed over the past quarter, with many companies suffering cashflow problems as a result.
The service sector, which includes restaurants, gyms and travel companies, was particularly hard hit, the survey found, as consumers tightened their spending and struggled to cope with rising fuel and food costs.
"We are now facing serious risks of recession," said David Kern, chief economic adviser to the BCC. "The outlook is grim and we believe that the correction period is likely to be longer and nastier than expected."
A recession is usually defined as two consecutive quarters with negative economic growth.
There was further bad news for the small business sector with the revelation that inflation had hit an 11-year high in June, rising from 3.3% to 3.8% and making any further cuts in interest rates highly unlikely in the near future.
But the BCC warned against any interest rate rises, claiming this would be a "serious mistake" if the Bank of England decided to tackle rising inflation by raising rates.
"Further increases in consumer price index inflation, to levels above 4%, are inevitable in the next few months whatever the monetary policy committee decides to do," said Kern.
The British Retail Consortium revealed that like-for-like sales were down by 0.4% in June, which will go some way to easing the inflationary pressure. But big rises in the price of fuel, food and non-alcoholic drink were behind the jump in inflation.
The FTSE 100 index recently dipped into a bear market, finishing 20% lower than its previous peak in June 2007.
