Unlike any previous recession though, this one will hit the South hardest, manufacturing will emerge relatively unscathed and the political centre will shift decisively to the right. No question, come the recovery, the British economy is going to look quite different.

As in all recessions, as demand goes down, unemployment will go up. Last month's figures of 5.5 per cent show the headline rate to be at its highest since early 1999. Even if you go along with government statistics which don't count the unemployed not on benefits, by international standards, the UK still looks pretty good. Yet unlike say 1992 or 1981, what we can expect to see are huge and ongoing job losses in financial services and the housing sector, especially estate agents, more often than not in the South.

Contrary to popular belief, the UK's Financial Services Industry has a wide geographical base outside of the City, with centres in Leeds, Edinburgh and the regions often performing vital back and middle office functions. Yet, apart from Northern Rock and Bradford and Bingley, these job losses have been hitting those at the top in London; investment banks like Lehman Bros, Morgan Stanley and UBS. And no doubt many more of these blue chip outfits are going to wield the knife when the 2008 annual accounts reveal their full exposure to the sub-prime debacle. As for the estate agents, apart from Jon Hunt who sold Foxtons for £370m to a private equity firm in May 2007 – they don't always have the midas touch – none of them seem to have seen the crash coming. One forecast earlier this year anticipated 4,000 of Britain's 12,000 property brokers going to the wall. As a business that depends on commissions, with far fewer selling or building homes their outlook is to say the least, dire.

Meanwhile, don't look to consumers to lift the economy out of recession. Britons are adjusting their expectations downwards and soberly coming to terms with a personal debt mountain of £1.3 trillion. According to recent surveys by GfK NOP, households are already planning to cut back on presents and decorations this Christmas and their index of (consumer) sentiment is nearly at its lowest since the series began in 1974. This is borne out by a July forecast by EITO which anticipates very negative growth for the consumer electronics sector for the next two years.

Yet it is precisely because London and the South-East have been the most dynamic regions – when measured by economic activity in the private sector, that it is the most vulnerable. Unlike the North-East, with nearly 25 per cent of people employed in the public sector, the South typically has well under 20 per cent. As Britain's private sector goes into deeper recession, fuelled by the high cost of debt and declining investment, jobs will not be lost in the public sector and that won't go down well among cash-strapped taxpayers. At the same time, the healthier part of the northern economy – if you'll forgive the generalisation – will be manufacturing, engineering and technology companies. They can at least count on sterling's devaluation against the euro to keep exports competitive – exactly the reverse situation of 1981 and 1992. There will also be some benefit of falling input cost inflation; things like oil and other commodities have come some way off their highs and are much cheaper than a few months ago.

Yet there's a crucial political dimension to these gloomy circumstances. Earlier this week, Nationwide revealed that average house prices fell 1.7 per cent in September, having fallen for the 11th month in a row and 12.4 per cent down from a year ago. Few seem to realise how closely you can correlate the recovery in Conservative Party fortunes to the state of the housing market. For the first few months of Gordon Brown's premiership, house prices and the Labour Party's temporary poll lead held up and then nose-dived ever since. And while that's worse for home-owners, for the Tories at least, it can only get better. Many economists now fully expect homes to fall in value at least that much again before stabilisation in 2011.

Consequently, as projected growth and tax receipts fall precipitously, the Tories have quietly ditched "sharing the proceeds of growth" – in effect a quasi-commitment to Labour's continued tax and spend policies. Instead they have discovered that there is a new public and media appetite for cutting wasteful expenditure and a receptive audience to reorganising education, health and the welfare state along market friendly, outcomes-driven lines.

If, as is likely, David Cameron becomes Prime Minister, a ballooning budget deficit will demand many tough expenditure cuts early on – other than on defence, he must not hesitate to do so. This downturn will create a new landscape where parsimony rules the roost. Banking may once again become the cautious profession and our politicians might at last hesitate to launch grand schemes and new quangos.

For the rest of us, though, trapped in a pincer movement of cripplingly expensive debt, even higher electricity costs and stubbornly resistant inflation, our financial affairs will get much worse before they get better.

Dan Lewis is research director of the Economic Research Council, www.ercouncil.org