Gordon Brown's predictions for the UK economy have again come under fire, as the chancellor defended his performance in a keynote speech on Monday.

Accountancy firm BDO Stoy Hayward has warned that business optimism has fallen to its lowest level since the immediate aftermath of the 11 September terror attacks.

The decline implies economic growth of 1.6% in the July to September quarter this year, and means Mr Brown "may well be forced to revise down his economic forecasts", BDO said.

Mr Brown's speech also addressed the role of the private sector in providing public services, and said there were limits to the role of the market in certain areas such as the health service.

Growing criticism

BDO's report echoes the findings on Friday of the National Institute of Social and Economic Research, a think tank, warning that Mr Brown's 2003 forecasts were too optimistic.

And think tank the Institute for Fiscal Studies said last week that UK might have to raise taxes by �11bn a year to plug a gap in government finances caused by sluggish economic growth.

On Wednesday, the Confederation of British Industry (CBI) is set to warn that a fall in confidence among UK manufacturers is more widespread than at any time in the last year.

'Credibility and resilience'

Mr Brown hit back at his critics on Monday, saying the UK is unusually well placed to weather the international economic storm.

"The true test of a policy", he insisted to the Social Market Foundation in London, "is whether it can cope with difficult as well as good times."

"I am confident that, tested in adversity, our system will demonstrate its credibility and resilience.

"Instead of being first into recession and last out, the country that normally suffers most, Britain has continued to grow over the past six years while other major economies have been in recession."

Interest rates 'to fall'

The Treasury predicts that the UK economy will grow by 2.5%-3.0% this year, hitting 3.0%-3.5% in 2004, after revising down its earlier forecasts.

But Monday's BDO report cautioned that, with fears of war against Iraq overhanging the economy, the forecasts were "optimistic".

Concerns over conflict, and a potential rise in oil prices, meant bosses were postponing decisions on purchasing and company expansion.

BDO urged the Bank of England to lower interest rates, held at 4.0% since November 2001, at its monthly meeting this week.

BDO forecast that rates would fall to 3% this year, as the Bank acted to underpin economic growth.

Recession warning

Earlier, Conservative Treasury spokesman Howard Flight, a millionaire City banker, outlined a gloomier scenario for the UK economy.

Politicians typically avoid predicting severe economic problems, for fear of talking the country into a downturn.

But Mr Flight said: "If you get a 1987, where the stock market falls then immediately recovers, both the economic and political effect scarcely exist.

"Where you get something analogous to what happened in the later 1920s and early 1930s which, alas, is what is happening today, then the economic and political impact is potentially huge."

But a Labour spokesman said the Conservatives wrongly predicted a recession in the late 1990s.

"While we can never be immune from the difficulties of the global economy, thanks to the tough decisions taken by the chancellor, Britain is much better placed than other countries and than we were under the Conservatives," he added.

Market limits

Mr Brown's speech to the Social Market Foundation also looked at the extent to which free markets and the private sector could be used to provide public services.

He noted that the "modern model" for the National Health Service (NHS) included "contestability to drive efficiency and reward innovation".

But he said the market could not work fully in health care provision as patients lack sufficient information to buy the right care, while some hospitals would effectively become local monopolies.

"We can make the case on efficiency as well as equity grounds that market failures in health care, as in some other services, are not easily subject to market solutions," Mr Brown said.

"Equality of access can best be guaranteed not just by public funding of health care but by public provision.

"If we were to go down the road of introducing markets wholesale into British health care we would be paying a very heavy price in efficiency and equity and be unable to deliver a Britain of opportunity and security for all."