Unemployment could carry on rising until 2011, says the Item club
Unemployment will soar to 3.4 million as the financial crisis deepens, forecasters predict ahead of official jobless figures this week.
The Ernst & Young Item Club says the number of those out of work in the UK will pass 3.25 million by the end of 2010, and hit 3.4 million in 2011.
"All of the economic statistics are now in free-fall," it said in its forecast.
It warned the next 12 months would see the UK economy suffer its largest contraction since 1946.
The UK's gross domestic product would shrink by 2.7% in 2009 and another 0.5% the following year, the Item Club said in its latest report on the UK economy.
The official unemployment total reached a 10-year high of 1.86 million last October and some analysts expect the figure to increase to two million when new figures are published on Wednesday.
The group says that inflation and interest rates will stay close to zero, helping pensioners and those with tracker mortgages.
However, it said these conditions will do little to aid the housing market, set to fall 22% more over the next 18 months as it remains starved of finance for new mortgages.
Meanwhile banks will be unable to lend to companies and consumers until the US sorts out its own banking problems.
"The government has failed to stop bankers hoarding cash and it seems this panicky behaviour is spreading out to the rest of the economy," the group warned.
The Item Club predicts that business investment will fall by nearly 17% this year, dropping almost another 6% in 2010 as worried company treasurers sit on cash.
In addition, consumer spending is expected to shrink 2.6% in 2009 as employees fearing for their jobs become "much more cautious" consumers.
The Item Club's chief economist Peter Spencer said: "It is easy to criticise and conclude that none of the government's policies are working.
"However, we must not lose sight of the fact that they have prevented the collapse of the monetary system as we know it.
"But more needs to be done urgently otherwise the flow of credit will remain frozen and the economy will remain in recession."
In one note of optimism, it added that the weak pound offered opportunities for struggling British manufacturers by encouraging exports, leaving them in a good position for the recovery it anticipates in international trade next year.
The Item Club said the UK economy could emerge from the recession in a more robust state, adding: "If it doesn't kill us, it will make us stronger."
Meanwhile, another report has forecast that the UK's jobs market will grow in the long term despite the current setbacks.
Working Futures, published by the UK Commission for Employment and Skills, said employment was projected to continue to rise over the decade as a whole, with the creation of 13.5 million job openings, of which two million will be new.
The majority of additional jobs will be taken by men, who were also expected to take more jobs in roles traditionally occupied by women, such as childcare, healthcare and beauty therapy, said the report.
Certain sectors and occupations will suffer job losses, particularly manufacturing, administrative and clerical work, which are expected to shed some 400,000 jobs over the next decade, it was reported.
Chris Humphries, chief executive of the UK Commission for Employment and Skills, said: "We're pretty confident that despite the short-term uncertainties the labour market will pick up again fairly swiftly and remain buoyant in the longer term to 2017."
Skills Secretary John Denham said: "The report is a welcome addition to the work we have been doing to make sure that our workforce is best placed to take advantage of the upturn when it comes."