Ernst & Young says British economy is shrinking but downturn will be short-lived

The British economy has already sunk into a recession, according to a leading economic forecaster.

The Ernst & Young Item Club predicted that the UK economy will shrink by 1% next year, with companies investing 5% less over 2009.

But the respected economic analyst said that the downturn would be short-lived, with falling inflation likely to mean the UK would be ripe for recovery in 2010.

During the next year, unemployment rates will soar, said the group, but if inflation falls then the Bank of England will be able to cut interest rates and bring the economy back to health.

Peter Spencer, the group's chief economist, told the BBC: “Even if equity markets stabilise and we begin to see capital flowing around the international financial system again, we are still looking at a domestic and global economy that will be in recession for the next 12 months.”