The UK faces prolonged economic misery from the impact of the credit crunch, a leading business organisation warned today.
The CBI said the effect of the tighter lending conditions on households and business "was yet to be fully felt" as it slashed growth estimates for this year and next.
It is blaming continued troubles in the credit markets, rising commodity prices and weak domestic and global demand.
In its latest quarterly economic forecast published today, it has lowered its figure for this year's rate of GDP growth down 0.2 per cent to 1.8 per cent.
The forecast for next year has also been marked down - the CBI's figure of 1.7 per cent GDP growth for 2009 contrasts with the Chancellor's more optimistic forecast in the recent Budget of between 2.25 per cent and 2.75 per cent.
At the same time as the economy slows, inflation is due to rise.
The CBI expects that the CPI rate of inflation will peak at 3.2 per cent in Q3 of this year, forcing the Governor of the Bank of England to write a second letter to the Chancellor. This compares with 2.7 per cent predicted in the previous forecast.
Due to the slowing economy, however, inflation is expected to come down in the longer term.
So, the CBI expects the Bank of England will be able to cut interest rates in the second and fourth quarters of this year, with one more reduction early next year. This would bring interest rates down to 4.5 per cent by early 2009.
Richard Lambert, the CBI's director-general, said: "Having enjoyed two years of strong growth, we are now living in uncertain times. We are facing a financial shock on a scale not experienced in recent times, which is coming on top of already slower growth.
"Outside the financial and property sectors the overall mood of business is, however, nothing like as gloomy as you might guess from reading today's headlines. While there are signs of a high street slowdown and some firms say it's getting harder to raise bank finance, around the country many still report quite positive conditions.
"So it is vitally important to keep the story in perspective. Although painful, write-offs by British banks represent a tiny fraction of their capital. After a few good years, the UK corporate balance sheet is in good shape. Our flexible labour market is a real force for stability and our best bet is still that our economy will continue to show modest growth this year and next, before starting a gradual recovery."
The biggest downward revision in the CBI's forecast has been to household spending, as purchasing power is heavily squeezed by higher food and energy prices. Consumption is forecast to slow more sharply than previously thought, from growth of 3.1 per cent last year to just 1.6 per cent this year - down 0.3 per cent on the previous forecast in December.
While the weakness of the pound will make the cost of imported goods and services more expensive, the depreciation of sterling will help exports. The CBI's forecast for net trade has improved for 2008 and 2009, with exports growing by 3.8 per cent this year and 5.5 per cent in the next, compared with imports ahead at just 2.2 per cent and 3.3 per cent respectively. Investment is forecast to slow this year - growing by 1.4 per cent compared with five per cent in 2007. A modest fall in property expenditure contrasts with continued growth in Government spending.
Ian McCafferty, the CBI's chief economic adviser, said: "The UK economy is being buffeted by some strong headwinds, with the prolonged troubles in the financial markets making for a bumpier ride both this year and next. High commodity prices are adding to inflationary pressures and significantly squeezing household incomes. And some households are feeling a chill from the credit freeze, with lending conditions becoming tighter.
"That said a slower economy will bring inflation down in the medium-term, so the Bank should be able to cut interest rates twice in 2008 and again early in 2009. Also on a brighter note, UK exports are being helped by a weaker pound, as the latest CBI manufacturing figures have confirmed."
RPI inflation - often used as a starting point for wage negotiations - will come down from 4.3 per cent last year to four per cent in 2008. Lower house price inflation and falling interest rates will see it reduce further in 2009, to 2.9 per cent.
The CBI believes public borrowing is likely to rise further than was predicted in the Budget - £43.2 billion in 2008 rising to £46 billion in 2009.
Unemployment figures have been revised down slightly for 2008 to 1.65 million but are unchanged for 2009 at 1.75 million.