Outlook 'worse than predicted'

Business body CBI told members that there was "no doubt that the mood has darkened in the last two or three months" and admitted that its initial growth estimates were over-optimistic.

Richard Lambert, director general of the CBI, said in a letter to members that the economy's growth prospects for next year and into 2010 "look no better than anaemic".

It has already cut its forecasts for growth in 2009 from 1% to 0.4%.

The U-turn on its economic outlook came as it said the credit crunch had turned out to be bigger and more prolonged than first feared, while inflation has also soared higher than predicted.

"A year ago, it seemed reasonable to hope that the worst would be over by now. This has turned out not to be the case," wrote Mr Lambert.

He added it was now clear that "the CBI, along with most other forecasters, has been consistently over-optimistic about the economic outlook over the past 12 months".

The CBI's downbeat assessment of the UK's economic prospects comes just days ahead of the official inflation figures for July and the Bank of England's latest quarterly inflation report, both of which are expected to make for grim reading.

Economists are expecting the Consumer Prices Index - the official measure of inflation - to have soared past 4% last month, up from 3.8% in June.

Predictions are for CPI to race towards the 5% mark this autumn as energy firms such as British Gas and EDF hike gas and electricity prices.