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The UK now faces a recession running into 2009.

The National Institute of Economic and Social Research (NIESR) economic review now points to the UK coming out a potential economic downturn in 2010.

Simon Kirby, research fellow at NIESR, said: "The economy appears to have contracted over the summer and we are now in our first recession since the early 1990s.

"There is an evens chance that the economy will contract for four quarters in a row."

He added the continuing credit crunch will further damage an already ailing economy.

"The abundance of credit was one of the major pillars of the house price bubble and consumption boom that sustained growth. The withdrawal of credit will exacerbate the downturn," he said.

The NIESR review also predicts house prices will fall nine per cent next year – with the housing downturn creating a major dragging factor on the economy.

Consumer spending is also expected to drop, dragging the UK into the worst downturn of all G7 countries.

The UK is adjudged to be especially vulnerable to the credit crisis because high levels of household debt and low levels of savings.

As the Bank of England responds to the slowing economy, interest rates are expected to fall half a percentage point at the beginning of 2009 – even though inflation is not expected to drop to the two per cent target until 2010.