Recession within year, say experts

In its latest quarterly economic forecast, the BCC said Britain was heading into a "technical" recession of two or more quarters of declining output over the next six or nine months. But a major recession similar to the downturn seen in the early 1990s was unlikely, the organisation said.

However, the BCC forecast that unemployment will climb by up to 300,000 over the next two to three years to nearly two million. It could even top the two million mark if conditions deteriorate.

David Kern, the BCC's economic adviser, said: "Our quarterly economic forecast highlights a significant worsening in UK economic prospects. There is now a distinct possibility of technical recession. The level of UK unemployment is likely to increase to nearly 300,000 over the next few years, reaching almost two million. An increase above two million cannot be ruled out."

The main drivers of the UK slowdown will be a "very sharp" deceleration in consumer spending growth as households tighten their belts amid soaring bills and falling house prices, the BCC said. Another contributory factor will be much lower growth in UK investment spending thanks to rock-bottom business confidence.

Last week Bank of England Governor Mervyn King also warned that the UK economy could suffer two quarters of negative growth as it went through a "difficult and painful adjustment". Inflation hit a record 4.4% in July, and Mr King warned it could spend the rest of this year around the 5% mark before it falls away through 2009.

Mr Kern said the UK urgently needed an interest rate cut to stimulate the economy. The Bank of England's Monetary Policy Committee (MPC) held rates at 5% in July, the third month in a row they were left unchanged.

"Our view is that the threats to growth are more serious and more immediate than the risks of higher inflation," Mr Kern said. "The UK economy urgently needs an interest rate cut to counter threats of recession."

BCC director general, David Frost added: "Whilst a marked slowdown in activity is likely over the next 18 months, even if interest rates are cut when inflation peaks, the correct policy decisions are still needed to ward off the threats of a serious and prolonged recession. The longer the MPC waits before cutting rates, the bigger the danger that the economic situation would deteriorate."

The BCC, which represents Britain's small and medium-sized businesses, said it was predicting GDP growth to fall to 1.3% this year and 1.1% in 2009. The economy grew 3% during 2007. Its May survey forecast a less abrupt slowdown, with growth of 1.7% in 2008, and to 1.6% in 2009.