Key adviser piles on the misery for Brown

The National Institute of Economic and Social Research (NIESR), a top think tank, said the economy "scarcely" grew in the three months to May.

Such a warning from a group, which also advises the Treasury, will stoke fears that a recession - when the economy slips for two quarters in a row - is now a distinct possibility.

It said gross domestic product rose 0.2% in the last quarter, a third of the pace of the three months to February.

The think tank also argues that inflation is so rampant that interest rates cannot be cut.

NIESR director Martin Weale said: "Despite the fact that the economy is now scarcely growing, we share the view that concerns about inflation make it more likely that interest rates will be raised than reduced in the coming months."

The Bank of England admits that inflation could rise to near 4% by the autumn, double the 2% target set by Brown when he was Chancellor.

Bank Governor Mervyn King warned an audience of bankers yesterday that the UK faces "a period of rising inflation and falling economic growth", though he stopped well short of predicting recession.

The Bank forecasts that expansion will slow to a 1% annual rate in the first quarter of 2009.

The economic slowdown has seen consumer confidence rocked and led employers to cut staff.

With unemployment numbers also out today, there is little chance of Brown or his Chancellor Alistair Darling enjoying any respite from the bad news.

The NIESR gloom comes as the European Commission (EC) starts disciplinary proceedings against the UK for breaching its economic rules.

It says Britain's budget deficit - the gap between what it spends and what it borrows - is far too large.

The disciplinary prooceedings are a formal warning to curb borrowing or cut spending.

Although the UK government cannot be fined, the launch of the proceedings is embarrassing for Darling and Brown.

The EC believes that Britain's deficit could rise to more than 3% of its GDP, breaching the rules of Europe's Growth and Stability pact.

The Treasury insists its policies remain "prudent".

Signs of eco-doom seem to be emerging from around the world. Yesterday alone, Vietnam effectively devalued its currency, the Bank of Canada held off on an expected interest rate cut while the Shanghai stock market fell by another 8% to its lowest this year.

Inflation is a worry in many countries. In Vietnam, for instance, it is currently running at 25%, while in India and China prices are rising at 8% a year.

Economists say that the world's central banks have failed to raise interest rates quickly enough to deal with the problem.