The Treasury and the Bank of England should start planning a large-scale currency intervention

Prof Peter Spencer

The Ernst & Young's Item Club is calling for the pound to be deliberately weakened.

It says that the Bank of England should intervene in the currency markets to sell the pound and buy the euro, bridging the chasm between the two.

The bleak warning - made in the Item Club's quarterly report - goes on to say that the high street and the housing market will follow the manufacturing sector into recession.

It adds that the economy won't pick up until 2003.

The Item Club has broken with convention in trying to influence the Bank of England, rather than just forecasting the state of the economy.

Precarious situation

"The present situation is so precarious that we have to come out and say something has got to be done," said the Item Club's Professor Peter Spencer.

The strength of the pound against the euro has meant that British manufacturers are struggling to compete in Europe.

Unless the pound falls soon you are going to see bodies falling out of the window in a big way

Prof Peter Spencer

The downturn in the manufacturing sector will next hit the level of employment and this in turn will knock down consumer sentiment and the housing market.

"Manufacturing is already in recession and this rot will spread if it is not stopped soon," says the report.

Ruth Lea, head of policy at the Institute of Directors, agrees that there will be a "further slowdown of the economy".

"Manufacturing looks pretty grim... and the economy is deteriorating quite concerningly and worryingly," she told Radio 4's Today programme.

Intervention

The Item Club wants the Bank of England, preferably in collaboration with the European Central Bank and the US Federal Reserve, to intervene and artificially weaken the strength of the pound against the euro.

"The Treasury and the Bank of England should start planning a large-scale currency intervention: to sell the pound against the euro this autumn," says the report.

But the authorities have traditionally been reluctant to intervene because of the risk that the pound will continue falling beyond the desired level.

Ms Lea also doesn't support an intervention in case it leads to inflation and then forces the Bank of England to put up interest rates.

But she acknowledges that the Bank is faced with a dilemma.

"I wouldn't want to be a member of the monetary policy committee [right now]," she added.

Lowered growth forecast

The think-tank - that bases its predictions on the Treasury's own economic model - predicts that the UK's economic growth will fall dramatically this year to levels not seen since the early 1990s.

Manufacturing is already in recession and this rot will spread if it is not stopped soon

Prof Peter Spencer

Gross Domestic Product - the broadest indicator of economic growth - will fall to 1.8% in 2001 from 3.1% in 2000, according to the report.

And a quick recovery is unlikely, with growth set to stay slow at 2% during 2002 before picking up to 2.9% in 2003.

"Unless the pound falls soon, you are going to see bodies falling out of the window in a big way," said Professor Spencer.