Unemployment will rise to its highest level since 1997 as the credit crisis takes its toll on the real economy, the latest survey of the Chartered Institute of Personnel and Development.

The institute said unemployment will rise by 150,000 next year to 1.8 million, its highest since Labour came to power. The number of people in work will edge up just 0.25 per cent or 75,000 in the year to December 2008, a third of the figure for the last two years.

John Philpott, the institute’s chief economist, said the financial services sector will be worst hit, as it faces a direct exposure to the turbulence in credit markets.

He said: “This will present a challenge to those human resources professionals who have not had to walk the tightrope of laying off large numbers of people while ensuring that people who keep their jobs remain committed and motivated.

“Many HR professionals will be dusting off redundancy manuals in the coming months to re-discover best practice on trimming staffing levels,” Mr Philpott said.

The study comes after separate Treasury estimates forecast a 12 per cent rise in the number of people claiming unemployment benefits, bringing the total to 910,000.

Mr Philpott said: "With jobs also harder to come by this could reinforce the impact of the economic slowdown, possibly necessitating bigger cuts in interest rates than currently anticipated to head off the threat of recession and a worrying prolongation of the slowdown into 2009.”

Job cuts in the public sector have been offset by growth in the private sector in the last two years, according to the institute, which has 130,000 members.

Mr Philpott said: “But 2008 will be the first year for a decade that the engine of job creation will be spluttering right across the economy”.

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