Britain is fast heading into recession this winter despite Washington’s $700 billion deal to bail out America’s banks, say economic forecasters.

This weekend economists cut growth predictions, warning that Britain faces a long and deep recession with unemployment rising by up to 1m.

Gloom over the economic impact of the banking crisis has intensified, with economists warning that the credit crunch is hitting hard because many parts of the financial system have stopped functioning.

Royal Bank of Scotland (RBS), JP Morgan, Credit Suisse, Citigroup and Barclays Capital have all torn up their forecasts because of the rapid deterioration in the economic climate.

They now predict that the economy will shrink for at least two consecutive quarters, the technical definition of a recession. That means Britain will officially be in recession in January and that it will probably continue well into next year.

RBS predicts that the economy will have contracted by 0.3% during the third quarter and a further 0.3% in the final three months of this year. It also predicts that 700,000 people will lose their jobs between now and the end of next year, taking the number of those out of work up to 2.4m.

Ross Walker, an economist at the bank, said: “The real problem is not the consumer; it’s the corporate sector, which we now expect to slow much faster than we initially thought.”

Citigroup is even gloomier. It warns that consumer spending will see a bigger drop next year than in 1974, 1981 and 1991, the worst years of the last three big recessions. Unemployment, it says, will rise by 1m.

“Recent data and surveys make it clear that the overall economy is weakening rapidly and suggest that the recession is likely to be deep and severe,” said Michael Saunders, a Citigroup economist.

Robert Barrie, an economist with Credit Suisse, said the “downside risks” to the economy had increased significantly. “The last three recessions have lasted for the best part of two years rather than two quarters,” he said. “There are colleagues talking about stockpiling tinned food who think that it’s going to be a lot worse than that.”

The recession will play havoc with public finances. The Treasury still predicts that the economy will recover next year, growing by 2.25%-2.75%. Barclays Capital believes that GDP will shrink by 0.2%, while Citigroup is predicting a 0.6% contraction. Some analysts say that Alistair Darling, the chancellor, will be forced to down-grade his forecasts when the Treasury publishes its prebudget report at the end of this month. He will also acknowledge that public borrowing is set to rise sharply.

Gordon Brown, attending an emergency meeting of European leaders in Paris yesterday, proposed a £12 billion fund to help small businesses in Europe through the crisis.

“We have got to show how we can do more in Britain and across Europe to help small businesses, as well as households, through what is a difficult economic time but where I believe Britain can lead the way out of the difficulties,” he said.

Experts are sceptical about whether such a fund would have much impact. A survey this week of employment agencies will show the sharpest drop in recruitment for a decade, with demand for permanent and temporary staff down significantly and growth in staff salaries slowing to a halt.

The survey, by KPMG and the Recruitment & Employment Confederation, suggests that firms have been panicked by the crisis and are cutting back sharply.

Figures released tomorrow will reveal that new car sales have fallen by a fifth in the past month and are declining at the fastest rate since 1991. Sales fell from 417,000 in September 2007 to about 340,000, the fifth consecutive month of decline.

The abrupt slowdown has made Britain far less attractive to migrant labourers from eastern Europe. Employment agencies and the National Farmers’ Union (NFU) estimate that there has been a fall of up to 70% in the number of eastern Europeans prepared to work in Britain in recent months.

Philip Hudson, chief horticultural adviser to the NFU, said farms faced a “chronic shortage” of labour because of the reduction of foreign workers.

In a survey of 1,500 people by YouGov, the pollster, 24% said they were “seriously considering” leaving the country to avoid the economic slowdown. Men and workers living in London were most likely to be considering quitting Britain.

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