about the extent of the economic downturn facing the region.

Lindsay Thomas, a former director of the Financial Services Agency (FSA), who has been advising Northern Rock for six months, warned of 3.5 million unemployed by next Christmas and a secondary wave of business collapses in the early spring.

Speaking at the North-East Economic Forum (NEEF), in Newcastle, he said: “This is bad, make no mistake. This is going to be the biggest, most unremitting global recession since the Thirties. This is worse than anything in your past experience. It will be shorter than anything else, but it will be deeper.”

Business leaders said his words were sobering but that the region, with its diversified economy, was well placed to withstand the downturn.

Mr Thomas, who has advised Government ministers and the Conservative Shadow Cabinet, said: “It will be 18 months before we get to the end of the contraction stage.

By the end of next year, we will be near the bottom, but there will be secondary effects.

“I believe we will see in a few months many major UK firms on the brink of collapse.

That will send shivers through our whole economy and it will force the Government to step in, but it will not be able to save everybody.

“The US economy is contracting by three to four per cent a year. It is often said that when the US catches a cold, we catch pneumonia. Well, the US has already caught pneumonia.”

Lord Mandelson, the Business Secretary and former MP for Hartlepool, addressed the fourth annual forum via a videolink from London. He said: “We are not going to see the return of mass unemployment in the North-East. The difference between the North- East now and the Eighties and Nineties is that the economy has been transformed.

“Traditional industries have been replaced by knowledge- based technology-driven industries.

“That’s what gives me so much more hope and confidence.

“The economy looks bad at the moment, but people shouldn’t feel hopeless and certainly not helpless. The global economy is set to double in size in the next two decades so that means double the opportunity for us.”

Mr Thomas, who helped set up the FSA in 1997, predicted big name high street chains would be next to suffer.

He also foresaw another wave of insecurity in the financial sector.

He said: “I don’t want to frighten people. The message is not to be depressed, but to be determined.

“Management will need to start reassessing strategies: what happens if demand for your services falls by 15 or 30 per cent, and prices are forced down by a similar level?”

He praised the Government’s handling of the downturn and said greater spending on road building and social housing could kickstart the construction industry.

“Plan B is to print more money,” he said. “It will debase the currency and you will have to rein it in, but we will have to consider it.”

The downturn may have an environmental affect, too.

“In terms of meeting Kyoto targets we are going to do it remarkably quickly because economic activity will fall,” he said.

But when the economy picks up, Mr Thomas warned: “Beware the withdrawal symptoms. The scale-back in public funding in five to ten years time will hit all Government spending as we attempt to pay back the debt.”

Margaret Fay, chairwoman of the regional development agency One North-East, said: “In the past three years, the economy of the North-East has grown faster than any other region in the UK. We are far better placed now than at any other time to get out of this.”

Referring to the BBC’s business editor, she said: “We haven’t got to lose heart. It is very easy to do a Robert Peston and get bogged down in the traumas of today.”

Hugh Morgan-Williams, chairman of NEEF, said: “It would be wrong for us to get into a deepening spiral that will make things worse. There are some good things happening in the region, particularly in the field of renewable energy, which will be a big industry by 2020.”

Robin Bloom, of solicitors Dickenson Dees, said: “Even if there is a downturn of three or four per cent we will return to the levels of 2004 and 2005 when a lot of businesses were very successful. Let’s be realistic, but let’s not talk everything down otherwise it will be a self-fulfilling prophesy.”