By Harry Wallop and Edmund Conway
Consumer spending, which has been one of the main drivers of the Gordon Brown’s decade of boom, will collapse by the end of the year and not return to fully-positive territory until 2011, according to the Ernst & Young Item Club.
The report, which also predicts another 500,000 people will lose their jobs, provides a clear illustration of how the turmoil in the financial sector has spread “like a pandemic” from the City to “every part” of the lives of ordinary families.
It comes just days ahead of official figures showing that the economy is now in the early stages of a full-blown recession.
The Item Club, an influential forecasting house, predicts that consumer expenditure – on everything from food, clothes, holidays, household bills, home improvements and entertainment – will fall by 1.2 per cent in 2009, and increase by just 0.2 per cent in 2010 before growing by 1.9 per cent in 2011.
This compares to an average annual growth of 3.5 per cent over the last decade.
The report is the most gloomy assessment yet of how the impending recession will hit householders, with consumer expenditure the benchmark of how well or badly people are coping with economic pressures.
Professor Peter Spencer, the report’s author, said: “The way the virus is spreading is like a pandemic. It’s not just spreading from New York across the Atlantic. It is also spreading from the City to the real economy.
“The people who will really be squeezed are younger families with children who are finding it difficult to keep hold of their job – and dare I say it – their homes.”
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Worst Economic Slump Since Great Depression
By Edmund Conway
The warning underlines the fact that policymakers have failed to prevent the financial crisis from turning into a full-blown economic slump. It comes as world leaders agreed to hold a summit in New York billed as the “Bretton Woods meeting for the 21st century”.
In its major assessment of the global economy’s health, Deutsche Bank also warned that Britain is even more vulnerable than the US or the euro area, as it predicted that the powerhouses of India and China would fail to support the wider global economy through the downturn.
The banks’ economists Thomas Mayer and Peter Hooper said: “We now expect a major recession for the world economy over the year ahead, with growth in the industrial countries falling to its lowest level since the Great Depression and global growth falling to 1.2pc, its lowest level since the severe downturn of the early 1980s.”
According to the International Monetary Fund, global growth of anything less than 3pc constitutes a world recession. The warning was echoed by Richard Berner of Morgan Stanley, who said: “A global recession is now under way, and risks are still pointed to the downside for commodity prices and earnings.”
The forecasts came as President George W Bush called a summit of the Group of Eight leading economies for the weeks after the US Presidential Election in order to organise a concerted response to the economic downturn.