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E&Y: UK economy like a 'horror film'

Jaimie Kanwar

The UK is heading for an economic "horror movie" and will struggle to avoid recession next year, claims an influential think tank.

Economists from Ernst & Young's ITEM Club have predict that:

- Inflation will remain above the Government's target for the next 12 months.

- There will be a "substantial" increase in unemployment.

- Lower credit availability and a sharp reversal in the housing market will see consumer spending slow to a near standstill.

ITEM's chief economist Peter Spencer explained: "Both on the high street and in the housing market it is going to get a great deal worse before it gets better.

"We have already seen a housing crisis that has morphed from a credit crunch to a general collapse in confidence as prices have tumbled."

He added: "Consumers will inevitably cut back on non-essential spending in the face of the impact of rising food and energy prices on their discretionary incomes. Many parts of the leisure sector will be particularly hard hit."

ITEM backed the Chancellor's call for wage restraint in order to keep overall inflation under control.

The report said: "As with any horror movie, there is an escape route but it is not an easy one. It is imperative that wage increases remain restrained, despite the tremendous pressure from food and energy cost inflation."

The forecast comes after David Blanchflower, who sits on the Monetary Policy Committee, warned recent job losses could be "the tip of the iceberg".

In an interview in The Guardian newspaper, he said: "I think we are going into recession and we are probably in one right now."

He added: "We will probably have three or four quarters of negative growth, but the risks are to the downside.

"It's not too late to stop it, but we have to act right now. Monetary policy has been far too tight for too long. We can't just sit and do nothing as we have done for too long."