UK 'already suffering a double-dip recession'

Britain is already in the grip of a double-dip recession and the economy will not pick up until 2013. Those were the stark conclusions of major reports out today from two of the country's most respected forecasters.

The Ernst & Young Item Club and the Centre for Economics and Business Research (CEBR) also warn that unemployment will rise to nearly three million as private firms fail to recruit enough staff to offset job losses in the public sector.

The CEBR says the situation is so dire that interest rates will stay on hold until 2016. Item Club chief economic adviser, Peter Spencer, said: "Political uncertainty in the eurozone has paralysed the UK recovery."

The crisis on the Continent had made British businesses put investment and recruitment on hold because of fears of a cataclysmic breakup of the single currency zone. Meanwhile, high levels of inflation have been hitting consumer spending, the reports add.

Today sees a key test of the eurozone economy following Friday's decision by Standard & Poor's to downgrade a host of countries' credit ratings. France, by far the most important nation to have been downgraded, is attempting to persuade the financial markets to buy up €8.7bn of its debt in an auction this morning. Politicians and investors in all troubled countries will be watching closely to see how much more interest it will have to pay on those loans.

The CEBR and Item Club based their gloomy prognoses on their calculations that the economy will have contracted both in the last quarter of 2011 and the first quarter of this year. That outcome – two consecutive quarters of negative growth – would fulfil the definition of a formal recession.

On a trip to Hong Kong aimed at boosting the UK's trade with Asia the Chancellor, George Osborne, called for all European countries "to tackle the structural obstacles to growth that we've simply not had the political will to address in recent years".

"No one likes to see credit ratings downgraded," he said, "but what matters much more are the actions Western countries take to restore their own fiscal sustainability and take the structural reforms necessary to ensure productive, competitive economies".

Mr Osborne added that he believed growing Asian economies would create more export demand for British brands and services. But Douglas McWilliams, chief executive of the CEBR, warned that rapid growth in fast-growing economies of the East and Latin America was in fact stymieing the British economy by creating scarcity and high prices for resources.