Gloomy forecast for British economy

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The Centre for Economics and Business Research (CEBR) predicts that UK economy could shrink by as much as 2.9% next year as bank lending continues to stagnate.

This far exceeds official Treasury forecasts that the economy will shrink by between 0.75% and 1.25% next year, with the UK returning to growth in the second half of 2009.

But the CEBR's managing economist Ben Read said: "Our emerging central scenario suggests a contraction of 2.9%, driven by a steep fall in business investment of 20% due to continued restrictions on bank lending, as well as firms slashing budgets in order to stay afloat."

This would be the biggest slump since 1946 when the UK was wrestling with the aftermath of the Second World War and a freezing winter.

Several analysts have recently made predictions of a 2.5% fall in GDP next year - representing the worst annual performance since 1947.

Mr Reed said "things could be even worse", adding: "Despite public declarations by the Government that the banks ought to be lending more, it is clear the primary concern of many of our largest banks is to shore up their balance sheets."

CEBR's economists are warning about the danger of firms cutting investment at the same time as consumers rein in spending and save more.

Mr Read added: "If this...scenario occurs, a contraction of between 5% and 10% could be on the cards, setting the UK economy back by five years."

Earlier this week official figures confirmed the UK economy is sliding into recession faster than first thought. Revised data showed a sharper than expected 0.6% fall in output between July and September - the worst since 1990 and bigger than the 0.5% fall first estimated by the Office for National Statistics (ONS).