The economy is already in recession and will shrink by 1 per cent next year, forecasters have warned.
The Ernst & Young ITEM club, which uses the Treasury’s own model for its prediction, said the credit crunch will hit the UK “very hard” even if recent bank rescues restore calm to the financial system.
House prices will be 14 per cent below their 2007 peak by the end of the year and tumble a further 10 per cent in 2009 before stabilising in 2010, it added.
The gloomy prediction comes as official figures due on Friday are set to show the first quarter of economic contraction since 1992 between June and September. The ITEM club forecasts the economy will shrink for three further quarters before bottoming out in the second half of next year, and is looking for a weak recovery in 2010.
Unemployment could hit 2.2 million by the end of 2009 as the impact of the slowdown and cost-cutting by employers leads to lengthening dole queues, it said.
Mounting unemployment, tight credit conditions and falling house prices would also hit consumer confidence, with spending set to fall by 1.2 per cent next year, the ITEM club added.
Ronnie Bowker, senior partner at Ernst & Young in Birmingham, said he was most concerned about what affect this would have on the region’s traditional manufacturing base.
He said: “While most commentators accept that we are heading into a recession, one of my key concerns for the region is that the manufacturing sector had already weakened significantly before the worst of the economic crisis worked its way through the system.
“Although the credit crisis and economic slowdown are global issues, the tiger economies of China and India will still show significantly more growth and offer far more opportunities for business in the Midlands. Now, more than ever, the region’s manufacturing community must look east to expand their customer base beyond their domestic and traditional export economies.
The one bright spot according to the report will be rapidly-falling interest rates as the Bank of England cuts heavily in the face of recession.
Inflation is also expected to fall back to the Bank’s 2 per cent target, helped by falling food and oil prices.