It could be two years before we see recovery, says City expert

Financial Services Authority chairman Lord Turner made the prediction as he suggested Mr Brown had failed to spot that Labour's housing and credit boom was "fraught with systemic risk" .

The Tories seized on Lord Turner's remarks, appearing to contrast them with Chancellor Alistair Darling's projection that the economy would recover by the end of this year. In his pre-Budget report in November, Mr Darling claimed positive growth would return by 2010.

Many ministers assume the forecast will have to be revised in the spring Budget following a raft of bad news on mortgages, unemployment and banking. Today Lord Turner told BBC Radio 4: "I do not know whether in three months' time or six months' time we are going to be able to use words like 'green shoots' without everybody thinking, 'What an absurd thing to say'.

"But I do think that within two years, say, we will clearly be on an up path." Tomorrow, Britain is expected to be officially declared in recession when figures reveal a second successive quarter of negative growth.

Speaking last night at the Economist City Lecture, Lord Turner suggested that Mr Brown, along with many others, had overlooked the downside of complicated financial instruments ultimately based on bad loans.

He conceded the watchdog blundered over collapsed bank Northern Rock. But he added: "The far bigger failure - shared by bankers, regulators, central banks, finance ministers and academics across the world - was the failure to identify that the whole system was fraught with market-wide, systemic risk.

"The key problem was not that the supervision of Northern Rock was insufficient, but that we failed to piece together the jigsaw puzzle of a large UK current account deficit; rapid credit extension and house-price rises; the purchase of UK mortgage-backed securities by institutions in the US performing a new form of maturity transformation; and the potential for irrational exuberance in the market price of credit."

Shadow chief secretary to the treasury Philip Hammond said: "With Ministers deluding themselves that they can see "green shoots", Lord Turner's dose of common sense is a welcome reality check." And Tory leader David Cameron warned "the money would run out" if the country continued to spend and borrow.

He added: "This recession doesn't vindicate big government; it hammers the final nail in its coffin."

Meanwhile, a rift was growing between the Government and the FSA, with Chancellor Alistair Darling furious the watchdog gave him only an hour's notice on Friday that the ban on short-selling was to be lifted.

Short-selling has received some of the blame for this week's plunge in bank stocks. Mr Darling was said to have strongly advised the FSA not to make the move so soon, but officials feared legal action from hedge funds.