Slump ‘sets in for three years’

The economy is already in recession and will not recover from the financial turmoil until 2011, according to the influential economic thinktank, the Ernst & Young Item Club. Its report due out this week will predict that consumer spending will collapse by the end of the year while another 500,000 people will lose their jobs.

The report's author, economist Professor Peter Spencer said the economic crisis was spreading "like a pandemic" from the City to the domestic 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."

Businesses have already been hit by the slowdown in consumer spending and figures due on Thursday are expected to show that retail sales fell last month. At least one leading retail analyst is predicting the worst Christmas for shops in 30 years.