For most British businesses, the next few months will be the toughest that many of their staff will remember. Some of those workers, and a few of their bosses, will lose their jobs. Many will lose their homes as well.

Quite how painful it is going to be should become clearer over the next couple of weeks. Business leaders say the mood of consumers as life gets back to normal after the summer holidays will be a good guide to the prospects for the rest of the year. Many will have returned from the beach in a sunnier frame of mind. The signs are that it will last as long as the tan.

The economy was stagnant in the second quarter and could well shrink between now and the end of the year. For many businesses, such a slowdown will be devastating. A small fall in sales can have a big impact on profits unless costs fall as well. But for most businesses, costs are rising sharply. Two of the most important — energy and wages — will be key things to watch over the next few months. Employers can do little about the first. But they can control the second. Companies will try to resist inflation-busting wage claims and many are already planning job cuts.

The boom of recent years made it relatively easy for companies to make good profits and many chief executives have seen their reputations soar, along with their pay packets. Recession will sort out the good from the lucky. Already some of Britain’s most respected bosses, such as Sir Stuart Rose at Marks & Spencer, are coming under pressure as the performance of their businesses falters.

So far, the pain has been focused on sectors directly affected by the housing slump. Banks have been forced to write off billions of pounds on investments linked to the US housing market. As a result, they cut back mortgage lending, triggering a collapse in house purchases. According to some forecasts, there will be just 400,000 homes sold this year, almost 60 per cent fewer than in the depths of the recession in the early 1990s. This will plunge the housebuilding industry into crisis.

As the slowdown spreads into other sectors, bigger companies will tend to cope better than their smaller, weaker rivals. Particularly vulnerable will be companies with heavy borrowings after being bought out by their managements and private equity firms. A number of these have already gone to the wall. Expect many more.

Such failures will mean bad debts for the banks, which will also suffer rising losses from loans to consumers. This could leave some of them short of money themselves, with Barclays and HBOS tipped as the most likely to have to go back to their shareholders for more cash.

In America the banks are in even worse shape and some observers are predicting that at least one big name will go under. Dick Fuld, chief executive of Lehman Brothers, is working frantically to prevent his Wall Street bank from becoming that casualty.

Because Western banks still hold huge quantities of investments linked to US mortgages, the global financial system will not stabilise until American house prices stop falling. The rate of decrease is slowing. But the bottom may not be reached for another year or more. House prices in Britain could fall for even longer.

Another key price to watch is oil. The 25 per cent fall in the crude price since July has been the one bit of good news for the economy over the summer. By reducing the pressure on inflation, it will give the Bank of England more leeway to cut interest rates to help to revive flagging demand. The first cut may come before the end of the year.

The snag is that the fall in the oil price is partly due to signs that the slowdown in the US and Europe is spreading to the booming economies of Asia. That is bad news for British exporters who were counting on overseas sales to offset weakness at home. At least they will have the benefit of the pound at a 16-year low.

Opec countries are alarmed by the oil price slump and could decide to cut back production to boost the price. That would put the skids under shares, which on many measures are still overvalued. Expect share traders to be particularly nervous in October, the traditional month for stock market crashes.

Further share price weakness could make some companies vulnerable to takeover bids, particularly from cash-rich Gulf investors. There is talk in the City about a bid for Sainsbury’s where the Qatari Investment Authority has built a 27 per cent stake.

Many retail bosses are already complaining that conditions on the high street are the worst they have ever seen. A really bad Christmas could finish some of them off.

Watch for the winter sales to start even earlier this year, which at least will be good news for shoppers.