Unemployment will rise to almost three million next year and the economy will contract by almost two per cent, following a "dramatic drop-off in business conditions" over the past two months.

The Confederaton of British Industry (CBI) delivered its gloomy outlook forecast as it revised sharply downwards earlier forecasts made in September.

The employers' organisation predicts that the recession, which started in the third quarter of this year, will now run for most of 2009 and unemployment will peak at close to 2.9 million.

An earlier prediction that the economy would grow by just 0.3 per cent next year has been scaled back to a forecast of a 1.7 per cent contraction.

John Cridland, CBI Deputy Director-General, said: “What is clear is that the short and shallow recession we had hoped for a matter of months ago is now likely to be deeper and longer lasting."

The CBI has downgraded its expectations for UK economic growth "given the speed and force at which the downturn has hit the economy," said Mr Cridland. "But the fast-moving and global nature of this crisis means it is impossible to look far ahead with any certainty."

Falling inflation, though, would clear the way for further cuts in bank rates. The CBI expects inflation to fall to 1.7 per cent by the end of next year, undershooting the Bank of England's 2 per cent target. Interest rates could therefore be cut to as low as 1.5 per cent.

The CBI says that it expects the economy to shrink quarter-on-quarter by 0.8 per cent between October and December this year, and to contract again for the next three quarters before beginning a slow recovery throughout 2010.

Mr Cridland added: “An unwelcome consequence of the downturn will be a significant loss of jobs, many of them in sectors that have been relatively insulated until now.”

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