As the financial crisis continues to deteriorate, it is predicted that unemployment will reach 3.4 million. Official figures will be released later this week.

After unemployment reached an official 10-year high in October last year, Ernst & Young Item Club calculate that the number of people out of work in the UK will reach 3.25 million by the end of 2010, and may hit 3.4 million in 2011.

It also warns that this year will probably see the UK suffer its largest economic contraction since 1946, stating that the UK’s gross domestic product will shrink 2.7% this year and an extra 0.5% in 2010.

Ernst & Young also believe inflation and interest rates will stay near zero, which will help pensioners with tracker mortgages.

However, this also could cause trouble in the housing market, which is set to fall 22% over the next 18 months.

The banks will also be unable to lend money to companies and consumers until the US sorts out their banking problems.

They said: “The government has failed to stop bankers hoarding cash and it seems this panicky behaviour is spreading out to the rest of the economy.”

Ernst & Young also predict a drop of 17% in business investment in 2009, and another 6% fall on top of this in 2010. This on top of consumer spending shrinking by an expected 2.6% as jobs become more scarce, and consumers more cautious.

Their chief economist said: “it is easy to criticise and conclude than none of the government’s policies are working.
“However, we must not lose sight of the fact that they have prevented the collapse of the monetary system as we know it.
“But more needs to be done urgently otherwise the flow of credit will remain frozen and the economy will remain in recession.”

He added however, that the weak pound offers opportunities for British manufacturers to encourage exports, leaving the economy in a better state after the recession than prior to it.

Working Futures, published by the UK Commission for Employment and Skills, has predicted that employment will grow in the long term despite current problems. It believes that employment would rise over the next decade as a whole, creating 13.5 million jobs, 2 million of which will be new.

Men will take on the majority of the new roles, and are likely to take over some of the jobs more traditionally considered as women’s jobs e.g. childcare, beauty therapy etc

Certain occupational areas will suffer losses in jobs, particularly manufacturing, administration and clerical work, which are expected to lose around 400,000 jobs in the next decade.

Chief executive of the UK Commission for Employment and Skills, Chris Humphries, said: “We’re pretty confident that despite the short-term uncertainties the labour market will pick up again fairly swiftly and remain buoyant in the longer term to 2017.”