Hopes of a spring bounce in the economy were dented today after a report showed the UK will not recover until 2012.

Leading think-tank the National Institute of Economic and Social Research said output shrank 1.5% in the first quarter of 2009, meaning the economy has not grown for 12 months. It added that the economy will decline for another year and take a further two years to recover.

The grim outlook hit hopes the worst of the recession may be over. The FTSE 100 index dropped 4.65 to 3925.87.

The Bank of England, meanwhile, started its two-day meeting to set interest rates and discuss progress on its quantitative easing programme, introduced last month to pump new money into the economy and drive growth.

The Bank, led by Governor Mervyn King, is not expected to cut rates any further, having reduced them to an all-time low of 0.5%. It is also unlikely to make any further announcements on quantitative easing after saying the programme will take three months.

The NIESR said the current recession resembles the one that started in 1979 when Margaret Thatcher took power. The drop in output in the first three months of the year was broadly in line with the 1.6% slump at the end of 2008 and followed a 0.6% fall in the third quarter and no growth in the second.

“The output fall so far is very similar to that of the recession that began in the summer of 1979,” said the NIESR. “If the 1980s profile were followed, output would continue to decline for up to another year and it would take two further years before the level of output enjoyed at the start of 2008 would be reached again.”

Nationwide today said consumer confidence took a battering last month as unemployment rocketed. Its consumer confidence index fell to 41, matching the record low hit in January, from 43 in February.

“Feelings about the current labour market have weakened,” said Fionnuala Earley, Nationwide's chief economist. “Further reports of job losses are likely to have affected consumers.”

Howard Archer, chief UK economist at Global Insight, said: “GDP clearly declined very sharply again in the first quarter of 2009 after plunging by 1.6% in the fourth quarter of 2008. While some of the latest data and survey evidence has raised hopes that the rate of decline in economic activity could be starting to moderate, the UK clearly currently remains deep in contraction territory with a return to growth still looking some way off.”