‘Optimistic’ financial report: The worst is yet to come

By Laura Miller

Unemployment will escalate and consumer spending will continue to plummet well into 2011, according to an “optimistic” financial report out today.

Rapid action is needed from the government to stop a deep recession evolving into a depression over the next 12 months, is the gloomy message in the Ernst & Young Item Club winter forecast.

Using the same economic model as the Treasury, the club has also predicted unemployment will hit 3.25 million by the end of 2010, and 3.4 million the following year. Previous estimates had hoped the number of out of work Britons would peak at 3.1 million next year.

Peter Spencer, chief economic advisor to the Item Club, called for decisive action to stop a bad situation getting any worse.

“More needs to be done urgently otherwise the flow of credit will remain frozen and the economy will remain in recession,” he said.

On the high-street fear of unemployment will dictate consumer spending, and consumers will shun the shops in favour of saving in case they are forced to join the growing queues at jobcentres around the country.

GDP, the measure of the country’s economic growth, is set to shrink to 1946 levels.

But despite the club’s dire forecast professor Spencer defended the government’s measures so far to try to halt the effects of the economic downturn.

“It is easy to criticise and conclude that none of the government’s policies are working. However, we must not lose sight of the fact that they have prevented the collapse of the monetary system as we know it,” he said.

The Item Club predicts inflation and interest rates will both hover around zero, continuing the double edged sword of benefiting those on tracker mortgages but giving little assistance to savers.

Nor are troubles over for the beleaguered housing market; the club believes it has a further 22 per cent to fall over the next 18 months, though this could help stimulate the market as houses become more affordable.