UK economic outlook has "deteriorated dramatically

The economic outlook for the UK has "deteriorated dramatically" over the last three months, according to new research published today.

The quarterly Ernst & Young ITEM Club report, which assesses the health of the UK economy, claims that despite the government's recent move to pump tens of billions of pounds of taxpayer's money into the troubled banking sector the country's financial system remains in "an enfeebled state".

The report said the credit crunch would now hit the economy "very hard".

"With employment falling, housing and equity prices lower and credit hard to find, [our] forecast shows consumption falling back by 1.2 per cent in 2009 before staging a feeble recovery in 2010," it stated.

Ernst & Young said business optimism had been falling steeply and confidence in profitability had taken "a particularly big knock".

With rising commodity prices hitting corporate profits, Ernst & Young believed that with the exception of a few "end-cycle" industries such as aerospace "there is no residual strength anywhere".

However, in its report the firm said the weakening global economy would at least start to reverse recent commodity price increases, while recession would force down the price of oil still further.

With such declines, and assuming interest rates fall still further - particularly the rates at which banks lend to each other - Ernst & Young said the UK economy faces a recession that would prove to be "relatively short and shallow".

Ernst & Young's report comes after a week in which shares in Punch Taverns slumped by 23 per cent to 130.5p, while Enterprise Inns' stock fell 15 per cent to 108.25p.