The sharpest plunge in consumer spending since the Second World War will drive Britain this year into its deepest economic slump for 60 years, according to the country's leading economic research institute.

The headlong retreat from the high street by consumers is set to reach a scale not seen for generations, the National Institute of Economic and Social Research says in a bleak assessment of Britain's worsening prospects.

Consumer spending this year is set to plummet by 3.8 per cent - double the scale of a previous record annual drop, of 1.6 per cent, suffered in 1991, the institute forecasts.

The grim trend, already clear from the waning fortunes of troubled retailers, marks a sharp reversal after a decade in which consumer spending climbed at an average of almost 3.5 per cent a year.

The institute throws its weight behind a growing number of forecasts that Britain faces its gravest recession in the postwar era.

It expects the UK economy to shrink this year by 2.5 per cent and it concludes that the decline would be even steeper, at 2.7 per cent, but for the spillover into Britain from President Obama's planned $800billion (£558billion) stimulus measures in the United States.

The plunge in consumer spending predicted by the institute comes des-pite an expected resurgence in Britons' earnings growth, with real disposable incomes of households tipped to rise by 3.3 per cent this year, after an anaemic 1.5 per cent increase last year.

The boost to British competitiveness from a weak pound will offer a rare glimmer of hope, helping UK exports to rise by 2.4 per cent next year and pave the way for a recovery, the institute finds.

However, the first glimmerings of recovery will not emerge until this winter, with GDP set to keep falling through the third quarter.

The depth of the recession is set to take a big toll on the Government's finances, the report adds.

The Chancellor will be forced to borrow £128billion in 2009-10, £10billion more than his £118billion projection, and up to £140billion in the 2010-11 financial year.

It says that after excluding the cost of financial sector rescues such as Northern Rock, national debt will be 70 per cent of GDP by 2012-13, against the Treasury's 57 per cent forecast and almost double the 36.5 per cent for 2007.

— The Bank of England has lent £185 billion to Britain’s banks under its special liquidity scheme, it has revealed. The scheme, under which banks and building societies were allowed to swap illiquid assets for UK Treasury Bills, closed last Friday. It was launched last April. Describing use of the scheme as having been “considerable”, the Bank said that 32 banks and building societies had accessed the scheme — more than four fifths of those able to do so. The Bank said that they had swapped assets worth some £287 billion for UK Treasury Bills, but said that its valuation of these securities, as of last Friday, was only £242 billion.

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