Workers in London and the South East are likely to be worst hit by the recession, with one in 12 jobs being cut in the next 18 months, according to an analysis today.

The warning by the Local Government Association (LGA) came as Britain’s biggest employers’ organisation downgraded its forecast for the economy, saying that the recession would drag on until October next year, pushing unemployment to nearly 2.9 million.

The capital is tipped to be worst hit because of its dependence on the financial sector, where banks are expected to shed tens of thousands more jobs. Many construction firms, already hit hard by the housing downturn, are also based in and around London.

Manufacturing districts in the North and the West Midlands, such as Hull, Bradford, Coventry and Birmingham, are also likely to be badly hit, according to the LGA analysis.

However, it said that some areas in the South West and East Anglia, with big farming communities, will fare much better in relative terms, with only one in 30 posts projected to go by 2010. Plymouth and Cambridge appear to be the places least likely to see job losses.

The Confederation of British Industry (CBI) said the recession would be “longer and deeper” than its previous forecast in September. The economy would begin to recover substantially in 2010.

The scale of the downturn, with a 2.5 per cent cumulative drop in GDP from peak to trough, is set to match the last recession in the early 1990s, the CBI said, adding that there was a threat of an even sharper recession unless companies obtained cheaper, more plentiful credit. The seizure in the credit markets has prompted banks to curb lending and to raise interest charges, forcing many companies into difficulties.

John Cridland, the deputy director-general of the CBI, said: “The real economy has been battered and the jury is still out on whether all the different government interventions will work.”

Falling demand among consumers is taking a toll, with confidence among businesses reaching a record low last month, according to Lloyds TSB. The CBI said that household consumption would fall by 1.8 per cent next year, after rising by 1.6 per cent this year.

The decline in demand and funding constraints will force companies to make further job cuts, the CBI said. More than 16,000 jobs were cut by major companies last week alone, but it said one million people would lose their jobs by mid2010, leaving 2.85 million – nearly one in 10 of the work-force – unemployed.

The LGA report, compiled by Pacec (Public and Corporate Economic Consultants), shows that 1.7 million jobs could go in the next 18 months, including retirements and voluntary and compulsory redundancies.

Pacec analysed data from the two previous recessions and the growth performance of areas in the past two years, which it says is critical in predicting job losses. It looked, too, at a breakdown of the commercial, public and industrial sector in each region to see which posts were most vulnerable.

But it argues that it is impossible to predict the impact of the recession on job sectors alone and emphasises that local factors will have significant effects on actual employment.

It suggests that London will do badly, partly because of job losses in the financial sector and in construction and manufacturing on its periphery, but also because its performance over the past two years and in previous recessions was worse than in other parts of the country.

A spokesman for London Councils, representing the 32 boroughs, said: “This downturn is different from previous recessions, making it hard to predict where the challenge will be most severe.” However, there was a glimmer of hope for those living in the M4 corridor, Stoke-on-Trent and the areas round Newcastle, as Pacec said they would do better than London, with roughly one in 20 posts lost.

Anyone employed in business services, defence and public administration or the transport and service sector may also be protected, with some job increases even being predicted.

The report shows that the recent growth in Northern regions has placed them in a good position to cope. Rob Hamilton, the head of economic and urban policy at Newcastle City Council, said the city might fare better because it no longer had a big manufacturing or construction base.

There had also been less housing construction in the Newcastle area than in regions further south, such as Manchester, Liverpool and Leeds. Margaret Eaton, the chairman of the LGA, said there were marked differences in how local areas could fare: “A one-size-fits-all approach to dealing with the recession isn’t going to work.”

She suggested that councils should be given greater freedoms over transport, infrastructure, planning, economic development and skills.

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