Two years of gloom beckons for consumers

Consumers are likely to feel the impact of the economic squeeze well into next year, according to a leading firm of accountants.

Poorer households will among those worst hit, predicts Ernst & Young's ITEM Club in its latest quarterly economic survey.

The UK economy is in for two years of "sub-trend" growth, the forecast said, "unless the government takes firm and decisive action".

"As a last resort the government should borrow to fund mortage lenders, minimising the dangers of an over-reaction in the housing and [foreign] exchange markets."

The government today announced it was pumping £50bn of taxpayers' money into the mortgage market to ensure liquidity. The move was described by Liberal Democrat economic spokesman Vince Cable as being in danger of nationalising banks' losses.

The E&Y Club has meanwhile predicted that while employment levels in the UK will remain steady and that while a weak sterling will buoy exports, the effect of rising food, energy and transport costs were taking a big bite out of the family budget.

According to Peter Spencer, chief economic advisor to the firm's ITEM Club, "a substantial proportion of the population are going to be in for a rough ride. We are in for a massive sea change in the balance of the economy".

Spencer said a housing market slowdown - which will see prices fall by 10 per cent in the next two years and the number of people moving house falling by 40 per cent over the same period - will hit the high street, "particularly since consumers can't borrow to maintain spending growth".

E&Y's ITEM Club uses the Treasury's model of the UK economy, which means it can test whether the government's claims are consistent.