Professor Douglas McWilliams, chief executive of the Centre for Economics and Business Research, warned: "This doesn't yet look as bad as 1990-92. But it will feel uncomfortable, with job losses and weakening house prices."
Professor McWilliams is now predicting that the UK economy will narrowly miss a technical recession, with just one quarter of negative gross domestic product growth next year, rather than two. He added that although the economy might avoid recession, the effects of the economic slowdown would be sharply felt, with unemployment set to soar by 300,000 by the year 2000.
Staff at William Baird, clothing supplier to M&S, look set to become the next victims of the slowing economy. The company last week began consulting with unions about 435 job losses, and is expected to shut three factories - a lingerie factory in Gwent, a sweatshirt factory in Cheshire and a casual-wear factory in Caernarfon.
A spokesman for the company blamed the planned closures on weak high street sales, and stressed the decision was not related to any plans by M&S to shift more production overseas.
The expected job losses at William Baird follow a series of recent cuts at a wide range of UK companies. Last week alone, Shell, the oil giant, said 2,000 jobs could go in the UK, Vickers, the defence company, announced 1,100 job losses and British Steel closed a Rotherham mill.
The high pound has been blamed for at least some of the recent job losses in manufacturing, but a slowing domestic economy will make job losses in the service sector increasingly likely, according to economists.
Professor McWilliams forecasts that UK manufacturing output will contract by 2.3 per cent in 1999, while output in the hitherto buoyant service sector will stagnate. What is more, the sharp economic slowdown will "blow a hole" in the Chancellor's financial plans, he said. The CEBR head is predicting a public sector net cash requirement (PSNCR) - the new name for the public sector borrowing requirement - of pounds 24bn in 1993/4. The Chancellor's forecasts for growth are far more optimistic than Professor McWilliams. As a result, the Treasury is looking for a balanced budget by the new millennium.
A separate study by one of the former Treasury "wise men" has found that the pound is still 25 per cent overvalued against the mark, despite recent falls.
Professor Tim Congdon of Lombard Street Research estimates that the "fair value" of the pound - known by economists as purchasing power parity - is DM2.34. The pound closed on Friday at DM2.85. Professor Congdon also estimates sterling to be some 25 per cent overvalued against the dollar.