According to the forecasting house, the UK economy has ‘deteriorated dramatically’ for the last three months and is expected to continue to contract for a further nine months, before levelling out in the second half of 2009.

The forecasts come ahead of official figures due this week from the Office for National Statistics that are expected to confirm that the UK economy shrank in the third quarter of this year.

In its report, the ITEM Club said that GDP will fall by one per cent next year which will be the first year of negative growth since 1992. Commenting, chief economist to the Ernst & Young ITEM Club Peter Spencer, said:

“Gordon Brown may have won plaudits for stopping the systematic meltdown of the banking system over the last few days. But, we now have to face up to the reality of an economy that has been seriously weakened by recent dramatic events.

“The effects of the credit crisis are spreading out from the financial and housing sectors and impacting every part of our domestic economy.”

According to the forecasts, good news comes in the form of inflation and despite the fact that it has recently hit 5.2 per cent, this will not last long and inflation will soon begin to fall, allowing the MPC to dramatically cut the base interest rate.

Speaking of recession, Mr Spencer added: “We are still looking at a domestic and global economy that will be in recession for the next 12 months. But with plunging interest rates, falling inflation, a fundamentally strong economy and some sort of stability in the banking system it should be a relatively short and shallow downturn.”

However, consumers can expect the stretch on their finances to continue as real disposable incomes are forecast to remain flat throughout 2009 before seeing a modest rise in 2010. And, this could spell disaster for consumer debt, Mr Spencer added:

“Last year consumers were able to handle the income squeeze by borrowing and dipping into their savings. This year it is a very different story with credit harder to access and far more expensive.

“The next 12 months will be really tough for consumers and corporates, particularly those who have never experienced one before. It’s far too early to be thinking about any recovery.”

© Fair Investment Company Ltd