The UK economy is set to contract by 4.5 per cent this year, before recording a slight rise in 2010, a financial report has said.
The Ernst & Young ITEM Club also predicted that 'base rates will be pinned to the floor over the next 18 months, undermining a recovery in sterling.'
While a stabilisation of the UK economy was acknowledged, hopes of a substantial recovery are now running ahead of reality.
"Although GDP fell by 1.8 per cent in the final quarter of last year and a staggering 2.4 per cent in the first quarter, there have been encouraging signs recently," it said.
"The ITEM Club's view is that the economy has now been stabilised but remains critical and on life support. It remains unclear how quick and complete the recovery will be and there is still the chance for a serious relapse."
The 4.5 per cent yearly fall would represent the steepest annual fall in the UK economy since the end of the Second World War.
While there are hopes that the worst of the economic downturn is over, the Ernst & Young ITEM Club warned that a swine flu pandemic could be disastrous for the economy, potentially reducing GDP by a further three per cent this year and an additional 1.7 per cent in 2010.
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