Both the Prime Minister and the Governor of Bank of England (BoE) along with a leading academic think tank of Britain have finally conceded that the UK is about to hit recession.

The admission took its own sweet time coming and the reason for the foot dragging became apparent as soon as the BoE governor gave his authoritative support to the lingering prospects of a serious economic slow down. The British pound found itself being pounded from all sides by all the competing currencies led by the dollar.

BoE governor Mervyn King had said the British banking system had been closer to collapse earlier this month than at any time since the start of World War I.

Although Mr King saw hopeful signs of easing in the credit markets, with credit default premia declining and Libor spreads also calming, the IMF warned that Europe’s banking system remains stressed. The Fund said that more European banks may fail as cash injections dry up and the region’s economy grinds to a near-halt next year.

In the US, the Federal Reserve said that it would finance up to $540 billion (£320 billion) in purchases of short-term debt from troubled money market mutual funds. The Fed will lend money to five special-purpose vehicles, to be run by JPMorgan Chase, as part of its continuing efforts to stabilise the financial system.

The admission from the BoE that recession is likely is significant. As recently as when the bank’s last inflation report was published in August, the governor maintained that economic activity would be “broadly flat” over the next year. Mr King then dismissed the media’s apparent obsession with the possibility of a recession. “I think the important question is not whether or not there is a quarter or two of negative growth... but whether we can maintain the broadly flat path of output or whether there is the downside risk materialising of a more severe downturn.” That was what he had said then.

Pressure is growing on the Chancellor to radically downgrade his own growth forecasts when he delivers his pre-budget report in the next few weeks. Mr King’s more pessimistic view may also mean a more aggressive programme of interest rate cuts by the bank. Some observers see them falling to as low as two per cent next year, equal to their record low during the Bank’s 314-year history.

The UK economy last contracted in the second quarter of 1992. It recorded zero growth in the second quarter of this year. The conventional definition of a recession is two successive quarters of “negative growth”.

Although manufacturing now accounts for only 15 per cent of the British economy, the scale of the contraction in the sector and its implications for the wider economy shocked some analysts. Three large motor manufacturers – Nissan, Land Rover and Ford – have announced short-time working in recent weeks, and further cuts to output in other sectors seem certain to follow.

The CBI employers’ organisation also released a survey showing industrial orders falling to their lowest level since October 2003 and business confidence plummeting to its lowest level since the industrial shake-out of the early 1980s.

The property market, meanwhile, remains in the doldrums. HM Revenue and Customs reported 61,000 residential properties changed hands in September, less than half the number sold in the same month last year. This decline will continue to have a depressing effect on spending and growth.

Other signs of the widening economic crisis are: oil fell below $70 a barrel. Brent crude was down $2.62 at $67.10 a barrel at one stage. The pound fell to $1.620, its lowest level against the dollar since September 2003, following Mervyn King’s warning. Further interest rate cuts would make sterling a less attractive investment.

Europe’s banks have borrowed $72 billion in short-term loans from the European Central Bank. The ECB has had to replace commercial banks to keep euro zone money markets functioning. The Yorkshire Building Society is to take over its smaller rival, the Barnsley Building Society, in the latest deal among the UK’s building societies resulting from the international financial crisis.

The Bank of England has also been criticised for being too slow to cut interest rates in response to the UK’s worsening economic situation. The National Institute of Economic and Social Research has said the UK is on the brink of its first full year of recession since 1991.

In its forecast, the NIESR predicted that Britain’s economy would shrink by 0.9 per cent in 2009, with consumer spending falling by 3.4, business investment down by 3.8 and private housing investment 17.1 per cent lower. It also warned that if the government’s £50 billion banking bail-out did not succeed, the recession could be even deeper and longer.

Sterling tumbled across the board midway through the week falling five cents against the dollar to a five-year low of $1.6203. Sterling fell 2.5 per cent against the yen to Y128.18, and slipped 0.6 per cent against the euro to £0.7874. The economy is likely to shrink by 0.9 per cent over the course of 2009 and suffer the first full year of recession since 1991, according to NIESR.

Moreover, there was a one in three chance the recession could stretch on longer than that, as demand was further hit by banks scrambling to withdraw credit from over-extended consumers.

As a result of the financial crisis, trend growth – the rate at which the economy can grow without generating inflation – is said to have been “permanently” damaged. Trend growth was likely to be no more than 2.2 -2.3 per cent, a growth rate with serious implications for the Treasury’s to collect anything like its forecast levels of revenues in years ahead.

The abundance of credit, the main reason why banks are facing a crisis, had fuelled demand in recent years, leaving consumers even more exposed to a downturn. On average, private household debt was 170 per cent of disposable income in the UK against just less than 140 per cent in the US and 100 per cent in Continental economies.