The UK will see only a weak recovery in 2003, with further falls in public finances and tumbling house prices, according to a leading think tank.

The National Institute of Social and Economic Research (NIESR) has suggested that the Chancellor Gordon Brown's predictions for this year are too optimistic.

The economy will stage only a sluggish recovery this year Martin Weale, NIESR

It has revised downwards its projections for 2003 and now predicts the economy will grow by just 2.2%, and by 2.4% in 2004.

This is lower than its forecasts made in October and below Mr Brown's predictions made in his Pre-Budget Report.

'Sluggish recovery'

Mr Brown suggested in November that the economy would grow by 2.5% to 3% this year and by 3% to 3.5% in 2004.

But Martin Weale, the author of NIESR's report, said the Chancellor had been too optimistic.

"The economy will stage only a sluggish recovery this year," said Mr Weale.

If house prices were to fall by 20%.... consumer spending would grow by 2.5% in 2003, rather than by 3.2% Martin Weale

The NIESR has also suggested the UK's public finances will slip deeper into the red.

It predicts net borrowing of �28.6bn in 2004-5, more than a third higher than the Treasury's forecast of �19bn.

Earlier this week, the Institute for Fiscal Studies (IFS) said Mr Brown was likely to meet his borrowing targets during the next two financial years.

But the IFS warned that the government may have to increase taxes from 2005 onwards and be forced to borrow up to �28bn a year, well above the Chancellor's current forecast of �19bn.

Boom to bust?

The housing market is also vulnerable, according to the NIESR's gloomy report.

The major risk to the global economy in the months ahead is the effect of a war with Iraq Ray Barrell, NIESR

It foresees the current 'boom' will losing momentum in coming months, with price rises of just 4% in 2003 - although it has cautioned against even such modest growth.

"A risk to the overall economic forecast is that house prices might decline this year.

"If house prices were to fall by 20% in the year to the fourth quarter of 2003, consumer spending would grow by 2.5% in 2003, rather than by 3.2%," warned Mr Weale.

Mortgage lenders have differed in their predictions for house price growth in recent months, but earlier this week, the Nationwide building society predicted rises would ease this year.

War risks

In a separate report, the NIESR warned of a slow global recovery.

It said global gross domestic product (GDP) would grow by 3.3% a year in both 2003 and 2004.

"The major risk to the global economy in the months ahead is the effect of a war with Iraq," said Ray Burrell, author of the second report.

He warned that a war would spark higher oil prices and have a knock-on effect on GDP.