BRITAIN'S economy is lurching towards recession with conditions on the high street and in the housing market likely to get much worse before they improve and unemployment set to soar, a respected forecasting group warned today.

The gloomy report by the Ernst & Young ITEM Club also predicted that inflation would remain above three per cent for the next year, but indicated that interest rates could fall to four per cent by the end of 2009, paving the way for a recovery in 2010.

Simon Allport, Ernst & Young's senior partner in Manchester, said: "A year ago, the consequences of a tightening credit market were still unclear.

"Markets were rallying in the hope that the credit crisis had been contained. However, economic prospects have deteriorated over the last three months.

"Consumer and market confidence remain key to economic sentiment, and it is difficult to see these improving this year."

Mr Allport added that the economy would `skirt on the edge of recession' in 2009 with growth forecast to be just one per cent. "At best, flat line growth is a certainty. At worst, recession is a real possibility," he warned.

Inflation and unemployment

"We expect inflation to remain above three per cent for the next 12 months with a substantial increase in unemployment.

"Both the high street and the housing market are likely to get worse before they get better. Demand for mortgages now seems to be falling faster than the supply, as buyers hold back in the expectation of further price falls.

"Construction, mortgage broking and related financial services have already been badly hit and ITEM predicts that house prices have significantly further to fall.

"Consumers are cutting social spending, as discretionary income is squeezed due to rising costs of credit, food and energy."

However, he said a reduction in interest rates could underpin a recovery in 2010, adding that the pressures faced by householders and businesses are less severe than those which confronted them in the early 1990s.

"Interest rates still remain relatively low, labour markets are more flexible and companies generally are in a stronger position," said Mr Allport.

"The fundamentals of many of the region's businesses remain relatively robust.

"Corporate Britain is better placed to weather the downturn, and the fall in the exchange rate should help the region's exporters."

Peter Spencer, chief economist to the ITEM Club, said many parts of the leisure sector would be hard hit by consumer cutbacks.

ITEM added that oil prices could peak at $150 a barrel this summer, falling back to $100 over the next two years.