UK Economy forecast, year of recession in 2009,

The British economy will contract in 2009 in its first full year of recession since the early 1990s, one of the country's leading economic forecasting groups said today.

Capital Economics said a combination of a weaker than anticipated domestic economy, a recession in the eurozone and the threat of a contraction in bank lending would result in a quarter-point reduction in gross domestic product next year.

The forecast, the first to suggest that Britain will have a year of negative growth, came after last week's news that growth in the economy came to a halt in the second quarter of this year. Capital Economics said the recession of 2009 would be sandwiched between two years of weak growth - 1.2% in 2008 and 1% in 2010.

Academics and City analysts have been trimming their estimates of 2009 growth, with the latest consensus for expansion of 0.9% next year. That is well below the latest forecasts delivered by Alistair Darling in his March budget. The chancellor said then that the economy would grow by 2% this year and 2.5% next, though he will be revising down his estimates in the pre-budget report this autumn.

A separate report yesterday from the ratings agency Standard & Poor's said Europe was no longer likely to remain immune from the US-prompted slowdown and should be braced for a period of stagflation, while the chief executive of Britain's biggest independent financial adviser warned that Britain was heading for further trouble.

"The state of the economy is very worrying and I don't think people have properly factored in how bad things really are," said Hargreaves Lansdown boss Peter Hargreaves.

S&P said the UK, with its high debt levels and declining housing market, was more exposed than the eurozone.

Vicky Redwood, of Capital Economics, said: "For now, we expect a modest contraction of about 0.25%. But given the magnitude of the downside risks, it is becoming clear that the possibility of another full-blown slump like that in the early 1990s cannot be dismissed out of hand. What's more, a fall in bank lending could mean that the economy takes even longer to get on its feet again. Even in 2010, we expect growth of just 1% or so.

"All this supports our view that interest rates will eventually fall much further than the markets currently expect. For now, we are sticking to our prediction that rates will drop to 3.5% next year, but we think it is quite plausible that they fall even further."

George Osborne, the shadow chancellor, said: "Another day brings another gloomy prediction. The Brown bubble has burst and, thanks to Labour's incompetence, nothing was put aside for a rainy day to help British families cope."