Last year, the consumer boom was a blessing in disguise

Peter Spencer Ernst & Young

The Ernst & Young's Item Club estimates that the UK economy will grow at 1.8% this year, undershooting the 2 - 2.5% target set by Mr Brown in the Budget.

The gloomier prediction comes just days after the Office for National Statistics revealed disappointing growth figures for the year so far.

The UK economy grew by a tiny 0.1% in the first three months of the year, leaving a lot of catching up to do if the full year figures are to live up to expectations.

Consumer slowdown

"Last year, the consumer boom was a blessing in disguise, rescuing the UK economy from the ravages of the global economic downturn," said Professor Peter Spencer, the Item Club's economic adviser.

People are more willing to see their pay frozen rather than lose their job

Peter Spencer

But he goes on to warn that high street spending must slow this year, either spontaneously or as a result of future tax or interest rate rises.

"We believe that the driver for the slowdown will be a fall in disposable income," Prof Spencer said.

The club is also predicting the house price boom will run out of steam, although this expectation contradicts several other reports on the UK housing market.

The Bank of England should keep interest rates at the current level of 4% until late summer, and then move back up to 5.5% over the next 12 months, the Item club suggests.

Axed pay rises

The report also highlights the UK's flexible labour market as a reason why a recession has been avoided.

"People are more willing to see their pay frozen rather than lose their job," Prof Spencer notes.

It is the first time that an economic slowdown has been reflected by a fall in earnings rather than a fall in employment.

The impending increase in employers' National Insurance contributions will move to further reduce pay rises and subdue inflation overall.

Separately, Oxford Economic Forecasting predicts that 100,000 jobs will be lost between 2002 and 2004 if workers are not willing to accept lower pay increases to compensate for the impact of the Budget.

Longer term outlook

The Item Club differs with Mr Brown's estimate of economic growth in 2003 as well as in 2002.

The chancellor has forecast growth of between 3% and 3.5% while the think-tank expects a more conservative 2.8%.

The Item Club is the only forecasting group to use the Treasury's own model of the economy.