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The Government and the Bank of England have got "days not weeks" to take action to revive the economy or face a prolonged depression, one of the UK's leading economists has warned.
Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club said that quantitative easing, whereby the Bank of England would print money to buy assets such as corporate bonds and consumer loans, was needed now.
"My concern is that people don't fully understand the dangers lurking out there. The Bank of England needs to move towards quantitative easing immediately you don't have to wait until you get to zero per cent interest rates. If someone is choking to death you don't think twice about giving them an emergency tracheotomy. There may be dangers, yes, but the alternative is that they die," he said.
"We are now in danger of seeing the economy choke: and once you get into a situation where people are hoarding as much cash as you can throw at them and interest rates are stuck at zero, you're in real, real trouble."
He made the comments before the publication of ITEM's latest economic forecast tomorrow, in which it predicts the economy will shrink by 2.7pc in 2009 the most since the Second World War. Gross domestic product (GDP) will fall again in 2010 by 0.5pc, ITEM will argue, which is in sharp contrast to the Chancellors' own prediction that the UK economy will start to recover in the second half of 2009.
The gloomy prediction comes before figures published on Friday provide the first official confirmation that the UK is in recession. The Office for National Statistics (ONS) is expected to reveal a sharp contraction in GDP in the final quarter of 2008, following a 0.6pc fall in the third.
"Our forecasts are relatively optimistic. The recession is already baked in. The question is whether we go from here into a decade of deflation if they make more mistakes that is pretty much on the cards or some pretty horrific numbers this year and some positives later on. They have days not weeks to play with," said Professor Spencer.
He conceded, however, that Government action to date had "prevented the collapse of the monetary system as we know it".
Separate figures from the ONS on Wednesday are expected to show that the deepening recession is taking its toll on the labour market, with unemployment up in November from 1.86m in October, and an acceleration in the number of people claiming jobless benefits in December. The number on unemployment benefits jumped by 75,700 to 1.07m in November.
ITEM predicts that overall UK unemployment will reach 3.4m in 2011 and that house prices have a further 22pc to fall over the next 18 months. It will also say that it expects a near 16pc drop in business investment in 2009, with a further 6pc decline in 2010.
Professor Spencer said: "Precautionary behaviour has begun to spread with corporates planning for the worst. Investment intentions and recruitment plans have collapsed. Company treasurers are very worried about what lies around the corner in 2009 and prefer to be sitting on cash."
Consumer spending will fall by 2.6pc in 2009, followed by 0.6pc in 2010, ITEM will say.
The start of 2009 has seen no let-up in the gloom facing the UK economy. Since January 5 more than 40,000 jobs have fallen victim to the economic downturn with high-profile companies such as Barclays, Nissan, Marks & Spencer and Jaguar Land Rover announcing redundancies. A number of businesses have fallen into administration, such as china and crystal group
Waterford Wedgwood, and a buyer could not be found for failed
high-street retailer Woolworths, resulting in the loss of approximately 27,000 jobs.
Action needed now to avoid depression, warns ITEM economist - Telegraph
Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club said that quantitative easing, whereby the Bank of England would print money to buy assets such as corporate bonds and consumer loans, was needed now.
"My concern is that people don't fully understand the dangers lurking out there. The Bank of England needs to move towards quantitative easing immediately you don't have to wait until you get to zero per cent interest rates. If someone is choking to death you don't think twice about giving them an emergency tracheotomy. There may be dangers, yes, but the alternative is that they die," he said.
"We are now in danger of seeing the economy choke: and once you get into a situation where people are hoarding as much cash as you can throw at them and interest rates are stuck at zero, you're in real, real trouble."
He made the comments before the publication of ITEM's latest economic forecast tomorrow, in which it predicts the economy will shrink by 2.7pc in 2009 the most since the Second World War. Gross domestic product (GDP) will fall again in 2010 by 0.5pc, ITEM will argue, which is in sharp contrast to the Chancellors' own prediction that the UK economy will start to recover in the second half of 2009.
The gloomy prediction comes before figures published on Friday provide the first official confirmation that the UK is in recession. The Office for National Statistics (ONS) is expected to reveal a sharp contraction in GDP in the final quarter of 2008, following a 0.6pc fall in the third.
"Our forecasts are relatively optimistic. The recession is already baked in. The question is whether we go from here into a decade of deflation if they make more mistakes that is pretty much on the cards or some pretty horrific numbers this year and some positives later on. They have days not weeks to play with," said Professor Spencer.
He conceded, however, that Government action to date had "prevented the collapse of the monetary system as we know it".
Separate figures from the ONS on Wednesday are expected to show that the deepening recession is taking its toll on the labour market, with unemployment up in November from 1.86m in October, and an acceleration in the number of people claiming jobless benefits in December. The number on unemployment benefits jumped by 75,700 to 1.07m in November.
ITEM predicts that overall UK unemployment will reach 3.4m in 2011 and that house prices have a further 22pc to fall over the next 18 months. It will also say that it expects a near 16pc drop in business investment in 2009, with a further 6pc decline in 2010.
Professor Spencer said: "Precautionary behaviour has begun to spread with corporates planning for the worst. Investment intentions and recruitment plans have collapsed. Company treasurers are very worried about what lies around the corner in 2009 and prefer to be sitting on cash."
Consumer spending will fall by 2.6pc in 2009, followed by 0.6pc in 2010, ITEM will say.
The start of 2009 has seen no let-up in the gloom facing the UK economy. Since January 5 more than 40,000 jobs have fallen victim to the economic downturn with high-profile companies such as Barclays, Nissan, Marks & Spencer and Jaguar Land Rover announcing redundancies. A number of businesses have fallen into administration, such as china and crystal group
Waterford Wedgwood, and a buyer could not be found for failed
high-street retailer Woolworths, resulting in the loss of approximately 27,000 jobs.
Action needed now to avoid depression, warns ITEM economist - Telegraph
