The chancellor’s cost of living package lowers the risk of a recession, a leading City economist has said.

In its latest forecast, the Bank of England said that growing pressure on household finances will lead to a deep economic downturn, suggesting that gross domestic product, the most comprehensive measure of economic growth, will contract by nearly a percentage point in the final quarter of the year.

Simon French, chief economist at Panmure Gordon, told Sky News that a key factor in this was the Office of Budget Responsibility predicting a fall in real incomes of 2.2% – but the support announced yesterday changes this because it puts more money back into people’s pockets.

“Our own estimates is that this halves that reduction, and therefore, you’re getting back into ranges that households in the historic past have been able to absorb through additional savings, taking on additional borrowing,” he said.

“And in a labour market that remains very strong, I think we can avoid a recession at the end of the year.”

He said Panmure Gordon is predicting a contraction in GDP in the second quarter of this year, which is from April to June.

He said this is largely a result of the extra bank holiday for the Jubilee, which previously generated large monthly contractions in June 2002 and June 2012.

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But in the second half of the year, Panmure Gordon predicts that a contraction can be avoided.

“That’s quite significant, given the fears that both the Office for Budget Responsibility and the Bank of England have around growth at the end of this year,” he said.

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