Lots of 'downsides' to come, warns Darling

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Alistair Darling said 2009 would be a bumpy ride, although he insisted that a recovery would follow.

"As we get through this, it is important to know that from here, in early January, we are going to see a lot of downsides," he said in an interview with the New Statesman.

The comments by the Chancellor, who last summer presciently predicted that the world slump would be the worst for 60 years, were a strong signal that the Treasury will have to revise its official forecasts downwards from the autumn prediction that the downturn would bottom out this year. New figures showed house prices fell for the 15th month in a row during January, wiping a further £2,500 off the average cost of a home, and economists warned of worse to come.

Sir Howard Davies, a former Bank of England policymaker and now director of the LSE, said: "In the US and the UK, people are going to get poorer. They are going to have to spend less than their income for a while as the economy deleverages. That is going to be politically extremely painful."

The Government was reeling today from political damage caused by a report from the International Monetary Fund that said Britain was likely to be harder hit than other western economies. Its verdict was embarrassing for Gordon Brown, who has repeatedly said the country was better placed than others to ride out an economic crisis because of his policies.

Huge debts, a housing bubble and heavy reliance on the credit-crunched financial sector had made Britain particularly vulnerable compared with other developed nations, the IMF said.

It predicted the economy will shrink by 2.8 per cent this year, more than twice as bad as previously thought and well above the two per cent average for advanced countries. Downing Street disputed the analysis, saying Japan and Italy were faring worse than the UK.

But Howard Archer, of IHS Global Insight, said the IMF forecast was "depressingly realistic", saying the shrinkage could be as bad as 3.1 per cent this year. Gordon Brown made a great play of the growth in the economy compared to the rest of Europe," he said. "It raises the question of whether the UK is in as structurally a sound position that we thought it was."