Half a million jobs will be lost in over the next three years as Britain's economic progress is derailed by crumbing consumer spending, falling house prices and excessive household debt.
In a pessimistic report on the state of the economy, Dutch investment bank ABN Amro said that Britain "is set for a dramatic decline" and will "remain depressed for several years".
It warned that 125,000 jobs could be lost in manufacturing, 100,000 in construction and 150,000 in retail.
One in 20 retail stores will close by 2006, it predicted.
James Carrick, ABN's chief UK economist, said the consumer slowdown would lead to the worse economic conditions since the slump of the early 1990s.
"Weaker consumer spending will trigger a chain reaction of higher unemployment and tumbling house prices, with an estimated 500,000 jobs to be lost from the retail, manufacturing, and construction sector by 2008," he said.
But if the retail sector reacts to the economic decline by cutting staff further, the final jobs toll could rise to 650,000, he warned.
Such large-scale job losses would spark a vicious cycle of lower spending leading to further job losses and spending cuts, with household debt only exacerbating the situation.
"A quarter of workers on average have no savings whatever, while another quarter have savings of less than one month's salary.
"Given the average duration of unemployment is seven months, households could run into a cash-flow crisis. They might cut spending sharply and could even be forced to sell their homes to liquidate assets."
"Momentum will make things worse," Carrick said. "For every 1,000 people made redundant, a further 400 jobs could be lost as those newly unemployed workers cut spending."
According to Carrick, the trigger for the slump in spending will be continuing falls in house prices.
"We expect house prices to fall by 10 per cent by the end of 2006. Mortgage approvals are down 35 per cent year-on-year and it is only time before this decrease in demand feeds through to lower prices."
Last month, the CBI warned that falling orders and rising costs would lead to up to 45,000 jobs to be lost in the manufacturing sector in the first half of this year.
Problems also seem to be brewing in the services sector. A recent survey by the Chartered Institute of Purchasing and Supply survey showed that conditions for service businesses are at their worst for two years.
Such a gloomy economic prognosis spells huge problems for the new Labour government as it seeks to finance its extravagant public spending plans and burgeoning budget deficit.
According to another economist, John Butler, of HSBC, winning yesterday's election was a "poisoned chalice" for Labour.
"It is hard to see which parts of the economy is likely to pick up the growth baton from the exhausted consumers," he added.