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Many economists are giving warning that the resulting slump in the economy could be as deep and painful as that suffered in the early Nineties, rather than merely a “technical recession” with two quarters of falling GDP.

George Magnus, senior economic adviser at UBS, said last night: "The early indications of recession from the third quarter I don't think will be that compelling. But this is only the beginning.

"I think this recession is going to go on for quite a long time, perhaps through next year, maybe even to the beginning of 2010. And in that sense, it is going to look quite nasty, compared with the two recessions that we had at the beginning of the Eighties and the beginning of the Nineties. "

Sushil Wadhwani, a former member of the Bank of England's Monetary Policy Committee, said:

"I think this is a very different situation [from the Eighties and Nineties}. I think the fourth quarter and the first quarter of next year we are likely to see a remarkably steep downturn. That is what history suggests happens when finance to small and medium-sized firms is restricted.

"I think we are going to end up being surprised by the suddenness by which output drops over the next two quarters. I think the numbers over the next two quarters are likely to be rather worse than the consensus is looking at and it could turn out to be quite frightening in terms of its impact on confidence."

The influential National Institute of Economic and Social Research (NIESR) predicted this week that the economy will shrink by 0.9 per cent next year, in its worst contraction since 1991, when GDP fell by 1.4 per cent.

The NIESR said that growth will crumble as the last year’s severe squeeze on households from soaring living costs, weak growth in incomes, slumping house prices, and a continuing credit drought trigger a sharp, consumer-led downturn.

Mounting fears over the potential scale of recession in the UK have also seen the pound plunge against the dollar in recent days as currency markets delivered a vote of no confidence in Britain’s prospects after a raft of grim economic news over the past month.

On Tuesday, Mr King said that “over the past month, the economic news has probably been the worst in such a short period for a very considerable time”.

Hopes of staving off a recession as deep and protracted as those in the early Nineties and early Eighties now rest on expectations of sharp cuts in interest rates by the Bank, and plans by the Chancellor to bring forward future public spending in his impending Pre-Budget Report.

The NIESR and City economists have cautioned that these measures are likely to have only a limited effect and that it is probably too late to prevent a potentially sharp recession.

However, Martin Weale, the NIESR's director, said last night: "The trouble is we don't really know how deep it is going to reach ... I think that the recession we are expecting won't be quite as severe as the recession that we had in the early Nineties, and that in turn was not as severe as that in the early 1980s, so that as recessions go, I am hopeful that it will turn out to be one of Britain's milder recessions."

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