BNP Paribas sounds UK recession alarm

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It said there was a "significant risk" that the economy will go into reverse for the first time since the early 1990s, and warned inflation will top 4% this autumn.

BNP economist Alan Clarke said: "The slowdown in gross domestic product growth is likely to be deeper and more prolonged than previously thought, with a significant risk of recession."

It came as rival bank Lehman Brothers said it is preparing for a 28% fall in UK house prices from last year's peak in one of the gloomiest forecasts yet for the beleaguered property market. Prices have so far fallen about 7% and a 28% decline would leave more than two million people with negative equity.

JPMorgan Chase said last night that the UK faces the "twin demons" of recession and runaway inflation for the first time in a generation.

BNP today said the consumer was set to encounter ever-stronger headwinds as a result of a "severe squeeze" on disposable incomes brought on by rising food, fuel and energy prices and the slowdown in the housing market.

Gas and electricity suppliers have already increased household bills once this year, and Clarke said a second wave of rises is on the way this summer, with a third in early 2009.

He said the resulting surge in inflation will hamper the Bank of England's ability to cut interest rates again this year, increasing the chances of recession. The Bank has cut rates three times since December, from 5.75% to 5%.

"Having eased aggressively in the early stages of the rate-cutting cycle, the surge in inflation, with worse to follow, has forced the MPC to pause," said Clarke. "The interruption in rate cuts will intensify the downturn in growth.

"We believe the next move in interest rates is more likely to be down than up, though not until 2009. In the near term, there is a significant risk of an interest rate hike, particularly if wage inflation snaps higher."