As people return to work today, the thought of unemployment in Britain rising strongly this year is unlikely to be far from their minds. From its current level of 6 per cent, it is likely to reach a figure of 9 per cent by next year. This will be a more painful economic downturn than young people, including young economists, have seen. But an economy is a patchwork of countless sectors and firms. Although UK employment generally will suffer, where is the downturn likely to have its most serious consequences?

Each recession has a distinctive character that is moulded by the special early forces that gave it life. To foresee where in the economy the most severe losses in jobs will come, we need to think about those underlying forces.

Four things drove this recession. They were the housing market, the price of oil, a loss of confidence in financial institutions and a contraction in bank lending. These, in turn, point us to the sectors of the economy that can be expected in 2009 to experience the most hardship.

The primary reason for the downturn can be traced back to the housing market. In large part, the world's unemployment rate is soaring because Western society came to believe that house prices only go up. Nobody wanted to fall behind their neighbour, whether literally or figuratively, and the idea of a world with ever-increasing house prices was promoted by mortgage lenders keen to outdo their commercial rivals, borrowers keen not to be left behind on the owner-occupier ladder, and consumers keen to borrow for a bigger car than the Joneses living next door. As the price of housing relative to incomes and other prices went farther and farther above the highest ratios ever seen, no one, particularly UK politicians, wanted to point out that fact. Just as in the earlier dot-com bubble, some analysts constructed complicated stories in their minds to rationalise what was fundamentally implausible. The return of more sensible house-price levels is making almost everyone feel worse off.

The current downturn will thus particularly hurt - and has already - every sector of the economy directly or indirectly connected to the UK's owner-occupied housing market. Estate agents have now suffered. Through 2009 the effects will spread into the retailers who sell, the craftsmen who make, and the firms that produce, the furniture, fabrics, paint, tiles, glass, insulation, carpets and everything else to do with the furnishing of a home.

The second trigger for this recession was the price of oil. Ten of the 11 postwar economic downturns have been preceded by a spike in the price of oil. Some commentators are starting to forget that even at the start of 2008 there was evidence of a weakening UK economy. One reason was the gradual consequences of the exceptional oil prices of the middle of the decade. Fossil fuel is the central ingredient of modern life. But the lags are long. Expensive energy therefore causes slow-acting but corrosive increases in businesses' costs. We know from modern economic research that it erodes profit margins, and leads to unemployment, as much as two, three or even four years later.

For that reason, the second segment of the economy that will be badly affected in 2009 are activities linked to, or that depend on, the cost of petroleum. This means the car business in all its forms, air travel, fuel supply, the chemical and fertiliser industries, and many pharmaceutical industries that rely on oil products as inputs.

The third stimulus for the current recession, and the most discussed, was the evaporation of trust in banking institutions. Here, few analysts, including me, were able to forecast what happened. In 2009, consequently, myriad sectors connected to modern finance will be hit. Some dull but important sub-sectors, like insurance, may survive without significant retrenchment. But many volatile and glamorous segments of the financial services sector, such as hedge funds and investment companies, will not.

The fourth recessionary influence was a domino-like decline in lending. Bankers now believe it is risky to make loans. That collective belief creates a spiral. As one lender demands greater collateral, that leads to a multiplier effect whereby others do. Credit begets credit. Lack of credit works in the same way in reverse.

Unfortunately for our economy, and for jobs later in 2009, this cause of the current recession is the one with the farthest-reaching consequences. Entrepreneurs, including lots of small UK businesses, will take the early salvo. There is much research to show that the prosperity of such businesses depends especially delicately on the supply of even quite small amounts of capital. Hence self-employment rates will fall. Another susceptible part of the economy here is the one that sells big-ticket items. All these - cars, big holidays and expensive electrical goods are natural examples - are particularly harshly affected by restrictions on people's credit.

An economy can be thought of as part-engine and part-organism. When the engine begins to stall, there are automatic mechanisms that are produced from within to attempt to repair it. That is why it is a mistake to view the economy, like Soviet planning once did, as merely a machine. Machines are not at all self-repairing. Yet the idea of the economy as a fully self-correcting organism came to prevail in the past 20 years, just as before the Great Depression of the 1930s. This is a natural mistake. If you sail on a flat sea for long enough, you come to believe that waves have been abolished.

John Maynard Keynes reminded us that an economy is not wholly a self-regulating organism; it cannot be relied on always to fix itself. That is why action is now needed. Counterintuitively, it is a good time to use debt to spend our way out of debt. What is irrational (indeed foolish) for a person can be rational (in fact crucial) for an economy.

Andrew Oswald is Professor of Economics at the University of Warwick

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