The economy is entering a period of "stickyflation", with a sharp slowdown in GDP growth combined with continuing inflation, the Institute of Directors has predicted.

Growth is projected to almost halve to 1.7 per cent in 2008, from more than three per cent last year, the business lobby group said yesterday.

The IoD says that the mood will be driven by slower consumer spending and a higher savings ratio, slower public spending, slower business investment and the turnaround in the commercial property cycle, and weaker financial services output.

"Stickyflation" means that inflation will slow in 2008, but not as quickly as output. This will reduce the Bank of England's ability to reduce interest rates. CPI inflation is forecast to average 2.2 per cent in 2008.

The IoD says inflation is likely to remain sticky in part because of higher producer output prices, higher wage demands and strong energy and food price pressures.

Richard Boot, IoD chairman in the West Midlands, said: "If the UK didn't face a 'stickyflation' problem the Bank of England would be able to more aggressively ease monetary policy in response to the economic slowdown."

Despite this constraint however, the IoD forecasts that UK base rates will fall to five per cent by the end of 2008.

"Much weaker growth and stubborn inflation will be the UK economic story for 2008," said Mr Boot. "The years of plenty look as though they are about to end."

The IoD says it is not predicting a recession this year, but is forecasting a "very significant slowdown" in GDP growth.

Mr Boot said: "We're entering the most uncertain economic period for 15 years. People need to understand that 2008 forecasts are being generated at a time when we still don't understand the full nature and scale of the impact of the credit crisis."

Meanwhile an upbeat note was struck by Andy Currie, managing director of Catalyst Corporate Finance, which has a major base in Birmingham. Despite forecasting a slowdown in deal volumes in 2008, there are many reasons to remain optimistic for the state of the economy this year, he said.