Britain is facing 18-month recession, economic experts warn

Capital Economics predicts that in 2009 gross domestic product - the value of the nation's output - will fall for the first time since the early Nineties, down 0.2 per cent.

But even this may turn out to be a conservative forecast, with the firm warning 'a full-blown slump is a growing possibility'.

Misery: The downturn in the economy has posed serious problems for the stock market

The definition of a recession is two or more consecutive quarters of negative GDP growth.

The latest Office for National Statistics figures show GDP growth was 0 per cent between April and June this year.

A recession is likely to bring financial misery across the country, including corporate collapses and widespread redundancies.

Capital Economics says the first recession for 17 years will be caused by banks stopping lending money, or cutting how much they lend, to firms and individuals.

This credit drought will have a 'dire' impact, according to Vicky Redwood, UK economist at Capital Economics.

Blame: Shadow Chancellor George Osborne castigated the PM for failing to leave any money in reserve

She said the obvious comparison for the current crisis is the Great Depression of the 1930s.

However, Capital Economics offered some hope for home-owners, predicting today's inflation of 4.4 per cent will fall sharply, allowing interest rates to be cut.

It expects rates, currently five per cent, to drop to 3.5 per cent next year and said even lower rates are plausible. Entrepreneur Peter Hargreaves also believes Britain has already entered a recession that it will not escape until the beginning of 2010 at the earliest.

The co-founder of investment firm Hargreaves Lansdown criticised the Government for failing to save during the boom years.

He said: 'You need money to spend your way out of a recession. But the Government hasn't got any, as it has been borrowing so much for so long and the banks haven't got any money because of the mistakes they made which led to the creditcrunch.

'Things are not looking good.'

He said the FTSE index of Britain's 100 top companies, which has already fallen from around 6,500 at the start of the year to about 5,500, is likely to go into the 4,000s and could take four years to fully recover.

Shadow Chancellor George Osborne said the Capital Economics forecast is proof of Labour's 'economic incompetence' after the Prime Minister's ten-year reign as Chancellor.

He added: 'The Brown bubble has burst and, thanks to Labour's economic incompetence, nothing was put aside for a rainy day to help British families cope.'

The Treasury, which predicts GDP growth of between 2.25 and 2.75 per cent next year, said other countries' economies are also facing difficulties.

A spokesman said: 'The UK, like other economies, is seeing the consequences of globally high commodity prices, as well as the uncertainty in the credit markets. The Government's priority is to guide Britain through these challenging times, while also supporting those hit hardest as a result of these global factors.'