UK in recession as average property prices see steepest decline in six years

The UK treasury is expected to confirm later this week that the economy is in recession as economists warn that recovery is unlikely before 2010.

When official figures are released on Thursday it will come as no surprise that they will show the first quarter of economic contraction since 1992 between June and September.

The Confederation of British Industry has been talking about recession for some weeks and today, a report from Ernst & Young says the economy is already in recession and will shrink by 1% next year.

The report from the Ernst & Young ITEM club, which uses the Treasury's own model for its prediction, said the credit crunch will hit the UK 'very hard' even if recent bank rescues restore calm to the financial system.

It also predicts that property prices will be 14% below their 2007 peak by the end of the year and tumble a further 10% in 2009 before stabilising in 2010.

'We now have to face up to the reality of an economy that has been seriously weakened by recent dramatic events. The effects of the credit crisis are spreading out from the financial and housing sectors and impacting every part of our domestic economy,' said Ernst & Young's chief economist Peter Spencer.

'Even if the equity markets stabilise and we begin to see capital flowing around the international financial system again we are still looking at a domestic and global economy that will be recession for the next 12 months,' he added.

Mounting unemployment, tight credit conditions and falling house prices would also hit consumer confidence, with spending set to fall by 1.2% next year. However inflation is likely to fall. 'With plunging interest rates, falling inflation, a fundamentally strong economy and some sort of stability in the banking system it should be a relatively short and shallow downturn,' he said.

The gloomy prediction comes as the latest figures show that house prices have suffered their biggest annual decline in at least six years. The average asking price for a home fell 4.9% from a year earlier, the most since records began in 2002, according to Rightmove, the property website.

'Certainly from an economic point of view, we've stared into the abyss,' said Miles Shipside, commercial director at Rightmove. 'With unemployment growing, we can see a lot of repossessions about to happen. The situation is going to get more severe,' he added.