Corporations and businesses have to brace themselves against the prospect of a contracting economy over the next three quarters, according to an Ernst & Young (E&Y) ITEM Club autumn forecast released today, which repots the UK economy is now in recession, following dramatic deterioration in the last quarter.

The ITEM report forecasts the economy will not bottom out before the second half of next year and expects only a weak recovery in 2010. It predicts the GDP is likely to drop by 1% next year – the first year of negative growth since 1992 and growth is forecast by only 1% in 2010.

‘We now have to face up to the reality of an economy that has been seriously weakened by recent dramatic events,’ Peter Spencer, Ernst & Young ITEM Club chief economist, says. ‘The effects of the credit crisis are spreading out from the financial and housing sectors and impacting every part of our domestic economy.’

ITEM warns the supply of credit is likely to remain severely restricted and corporate profitability will continue to suffer, triggering widespread reductions in investment and employment. Business investment is already subsiding and ITEM expects it to fall back by 5% next year.