Eurozone ‘heading for crisis on scale of Lehman Bros crash’

It expects gross domestic product (GDP) in the UK to grow by just 0.7 per cent in 2012, while economists at the group have also cut projections for this year from a previous forecast of between 1 and 1.5 per cent to 0.6 per cent. Both projections are well below other recent estimates.

Just weeks ago, the International Monetary Fund issued UK GDP growth forecasts of 1.1 per cent and 1.6 per cent for 2011 and 2012, respectively, having downgraded its earlier expectations.

At the weekend, it emerged that the Ernst & Young (E&Y) Item Club had downgraded its growth forecast for this year to 0.9 per cent and for next year to 1.5 per cent.

Britain’s economic woes are being compounded by the troubles across the Channel, the CEBR argued, as it highlighted the “failure of European politicians to take decisive action” to both calm markets and launch “pro-growth reforms at a fast enough rate”.

Today’s report comes ahead of a crunch European Union summit in Brussels this month, where wide-ranging measures to tackle the eurozone debt crisis are anticipated.

Meanwhile, the CEBR said it expected UK interest rates to remain at their current historic low of 0.5 per cent until the middle of 2013. After peaking at about 5 per cent, inflation is likely to fall back sharply, the think-tank added.

Scott Corfe, CEBR senior economist and main author of the report, said: ”Given the likely weakness of the economy, I suspect that many people will be surprised by how fast inflation falls next year. This in turn means that we will be likely to have more, rather than less, quantitative easing. Sterling is also likely to remain weak for the foreseeable future.”

Growth as low at the CEBR is projecting will heap pressure on the coalition government to rethink its programme of austerity cuts. However, the group conceded that this was a “medium-to-high risk strategy” given the market’s focus on reducing government debt.

Douglas McWilliams, another of the report’s authors and chief executive of the CEBR, said: “We can’t claim that we got our last forecast completely right because we have now had to revise down, reflecting the collapse of confidence in the financial markets.

“But we have certainly been less wrong than others and especially the Office for Budget Responsibility. We were the first to point out the consumer squeeze and also to draw attention to the sluggish recovery.”

He added: “The government is between a rock and a hard place. It is left hoping desperately that the Far Eastern economies and falling commodity prices can fuel a world recovery and that the European economy does not collapse as it deals with its currency and debt crises.

“In normal circumstances, I would call for a fiscal boost – but Gordon Brown spent the money that could have been used for a fiscal boost at a time when the economy didn’t need it.”

The CEBR believes that quantitative easing will extend to £300 billion or possibly as high as £400bn in the event of a “severe financial crisis”. The Bank of England this month extended its QE programme to £275bn.

E&Y’s Item Club said the few bright spots in the economy had “dimmed to a flicker”.