UK economy "struggling to avoid recession"

The UK economy will struggle to avoid recession in 2009.

The Ernst & Young Item Club summer forecast predicts GDP growth of one per cent for 2009 and inflation to stay between three per cent and five per cent.

The report also warns of a substantial increase in unemployment.

Item Club chief economist Peter Spencer said: "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 consumer spending could also fall from "their current state of denial into a state of despair", if the Bank of England does not cut interest rates.

The report predicts consumer spending will rise by just 0.2 per cent next year, as real disposable income shrinks to one per cent in 2008 and 1.5 per cent in 2009 while debt repayments grow.

"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," Mr Spencer warned.

"Many parts of the leisure sector will be particularly hard hit."

However, there is some good news as the Item Club report predicts oil prices to fall back to $100 a barrel in the next two years after peaking at $150.

Also the report predicts the economic slowdown will allow the Bank of England to cut interest rates this winter.

In the housing market, less disastrous house prices falls than generally mooted are predicted.

The forecast puts forward a ten per cent drop in 2008 and a six per cent fall in 2009.

"It is worth emphasising, however, that the correction in house prices is likely to be far greater outside London," Mr Spencer concluded.