The official figure for gross domestic product due to be published later this month is likely to show that output fell in the final quarter of 1998. Virtually every expert is also predicting a further decline in the first quarter of 1999, with two successive quarters of falling output the technical definition of a recession.
This would severely embarrass the Chancellor, who was criticised for over-optimism about the economy in November's Pre-Budget Report. A drop in GDP would almost certainly force the Treasury to downgrade its growth forecast for this year in the March Budget.
The new report from Deutsche Bank says GDP in the October-December quarter will have fallen for the first time since mid-1992, marking the end of seven years of economic expansion.
Business and retail surveys for November and December have shown a dramatic decline in activity.
The pace of the slowdown means the Bank of England will have to cut interest rates to 4.5 per cent from the current level of 6.25 per cent by the middle of this year, according to Steven Bell, Deutsche Bank's chief UK economist.
Although the Office for National Statistics will need to estimate some of the components of GDP for its preliminary figure due on 22 January, the best it could report is no change, according to Mr Bell. A negative figure would be much more likely. "This would make the Treasury growth forecast implausible," he said.
He added that the Budget would also have to contain much worse figures for government borrowing than published in November.
His gloomy prediction is supported by the latest monthly estimate of GDP published by the independent National Institute for Economic and Social Research.
It showed GDP flat in the three months to November, and December is likely to have been a weaker month. The National Institute is currently predicting growth of about 1 per cent in 1999.
Deutsche Bank expects GDP growth of minus 0.2 per cent for 1999 as a whole, in one of the gloomiest forecasts for the UK so far.
Even so, by past standards this would be a mild recession for the UK. A big increase in public spending in 1999, the weaker pound and cuts in interest rates will prevent a deeper downturn, in the absence of any serious overseas shocks.
Martin Weale, head of the National Institute, agreed with this basically benign view. "Monetary policy has been loosened quite a lot already. This should be about as bad as it gets," he said.
The Bank of England has cut rates by 1.25 percentage points since October.
The Bank's Monetary Policy Committee next meets on 6-7 January, and is expected either to leave rates unchanged or cut them by a quarter point.Reuse content