The new figures suggest that output in the UK fell by 0.2% in the final quarter of 1998, and will fall again in the first quarter of 1999 - the technical definition of a recession.

But the forecasters predict a mild recovery later in the year, with overall growth in 1999 of 0.4%. That is still a big drop from this year's growth rate of 2.7%, but it means the recession will be less pronounced than in previous downturns.

The recession will be mitigated by the fact that household and business debt is lower than it was in the early 1990s, and by the fact that the Bank of England has already started cutting interest rates before the recession starts to bite.

The report predicts that interest rates will be another 1% lower within the next six months, falling to 5.25%.

More risks

But the forecasters warns that there are plenty of things that could go wrong and trigger a deeper and more prolonged downturn.

"Clearly the international environment remains fragile and there is no guarantee that manufacturers will enjoy the relief of the expected drop in the pound sterling to DM2.65 over the coming year," the report said.

"Moreover there is a danger that the forecast underestimates the extent to which companies will scale back both their investment plans and employment, which in turn would hit consumer confidence even harder."

Manufacturing output falling

The report says it expects manufacturing output to fall by 1.5%, leading to widespread job losses.

These expectations have been confirmed by the latest survey from the Chartered Institute of Purchasing and Supply, which shows that manufacturing jobs are continuing to shrink as the high pound continues to bite. Employment has now shrunk for 10 months in a row.