Buy, buy 2008: next year we’re going for broke

The gross domestic product is now expected to fall by 2.5 per cent, worse than any time since the austere post-war era.

There are also predictions that property prices will drop for two more years to 35 per cent below their peak — negative equity for millions but a golden opportunity for first-time buyers when combined with low interest rates.

But the economic slump is good for shoppers as retailers are being forced to slash prices, with the West End enjoying record figures.

The latest verdict from the City on the depth of the downturn came from Jonathan Loynes, chief European economist at Capital Economics. He said a fall of 2.5 per cent in GDP next year would be as big a contraction in a single year as the entire course of the last recession in the early Nineties.

The pound fell today as investors speculated that the Bank of England will cut interest rates again next month to shore up the economy. Sterling later recovered to stand at 1.059 euros, up 0.1 of a cent. Official figures today showed the economy shrank 0.6 per cent in the third quarter of this year — a bigger fall than the 0.5 per cent originally thought. This revision fuelled speculation that the Treasury will have to downgrade the economic forecasts it made one month ago.

Gordon Brown has privately hinted that government forecasts of a swift recovery in the second half of next year may prove optimistic, largely due to the growing realisation that the banking crisis has been worse than predicted.

Ministers are also preparing for major job losses after Christmas with unemployment set to rise from 1.86 million to three million. Despite the massive turnout of shoppers over the past few days, more retail chains are expected to follow the fate of Woolworths.

Government sources believe that Alistair Darling will revise his figures in the spring Budget to show that the downturn has been grimmer than he suggested in the pre-Budget report last month.

The Chancellor admitted the UK economy will shrink next year, forecasting contraction in gross domestic product of 0.75 per cent to 1.25 per cent. The actual figure now looks set to be even worse. Matthew Sharratt, economist at Bank of America, said: "It really does paint an exceptionally gloomy picture about the speed with which the UK economy has lapsed into recession."

Output in the manufacturing sector fell 1.6 per cent between July and September while the services sector, which makes up four fifths of the UK economy, shrank by 0.5 per cent.

Howard Archer, chief UK economist at Global Insight, said: "While the GDP data still do not show the UK technically into recession yet, as defined by two successive declines in quarter-on-quarter GDP, we are entering into it big time in the fourth quarter."