Chancellor Gordon Brown's luck has run out - and he can't blame external events for the poor shape of the UK economy, according to today's Ernst & Young ITEM Club autumn forecast.

Last month the Chancellor was forced to concede that his Budget forecast was unrealistic and, following revisions to Office of National Statistics (ONS) figures, ITEM Club is now predicting that GDP will increase by just 1.6 per cent this year - half the Treasury's forecast.

ITEM is cautiously predicting GDP growth of 2.2 per cent for 2006, but this depends on sustained growth in the world economy and a recovery in exports and investments.

Prof Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, said: "The Chancellor is blaming the UK economic slowdown on the recent spike in oil prices and the weakness of the European economy, but this is unrealistic.

"The problems were plain to see at the time of last year's Pre-Budget Report in December, but, instead of addressing them then, the Treasury chose to dress up the UK finances for the election."

Prof Spencer said it was the failure to allow for the domestic risk that explains the error.

"The UK is actually in a unique position to benefit from high oil prices and, given the strength of the world economy, external factors cannot be blamed for the Treasury's forecasting errors," he said.

"The problem is actually home-grown, born out of a booming housing market and strong consumer spending, which has propped up the UK economy - until now."

He continued: "The personal sector has to rebalance through savings, which are not as strong as we had previously thought, and this will take time."

Prof Spencer believes that while some consumers have over-extended themselves and personal bankruptcies have increased, the household sector remains robust, with wage increases well ahead of inflation. The housing market, despite a mixed picture across the UK, is also looking stable.

"Despite a rise in the stock market and the world economy putting in its best performance in a generation last year, domestic business has been slow to react to the upturn," the professor said.

"UK exports have lagged behind world trade and investors have not responded to the increase in production.

"But the prospects for the business sector are still excellent and we have assumed a modest rise in exports and investment next year that would allow interest rates to remain on hold. However, if business fails to respond rates will be cut again in the new year."

He added: "The UK economy is on increasingly shaky ground... the Chancellor is facing a £11 billion black hole and is well on the way to breaking his golden rule as the economic cycle gets put back further - perhaps even indefinitely - as the slowdown makes it difficult to see where the cycle will end. These developments show just how flimsy the current budgetary framework is. Reform of the fiscal rules is long overdue."

Ronnie Bowker, senior partner at Ernst & Young's Birmingham office, said: "The ITEM Club's prediction, which is half of the Treasury's forecast, certainly reflects how the regional economy looks and feels.

"Over the last 12 months the region's manufacturing base has been hard hit and has experienced some high profile casualties. Marconi, Peugeot and Jaguar have all expressed their intentions to slash their workforce, and business confidence across the region is low."

He added: "What is most concerning is that despite the encouraging performance of the global economy, UK plc has been left behind. For local businesses to capitalise on this upturn they must continue to focus their efforts on value added products and services." ..SUPL: