Key forecaster cuts UK growth estimate on eurozone fears

Worries over the eurozone debt crisis have prompted the Ernst & Young Item Club to cut its forecast for GDP growth this year from 1.8% to 1.4%.

Peter Spencer, chief economic adviser to the much-watched Item Club, said the eurozone crisis had left the UK economy "at a critical juncture", with investors and businesses "lacking the confidence" to invest.

It predicts growth will remain sub-par next year at 2.2% - it had previously estimated 2.3% growth - but accelerate to 2.5% in 2013 and 2.7% a year later.

The lower forecast comes ahead of the publication this week of minutes from the Bank of England's latest Monetary Policy Committee meeting, and suggests interest rates will remain at historic lows for some time to come.

"The risks to the world economy and the eurozone are plain to see, starting with the Greek default which hangs like the sword of Damocles over Europe, threatening a domino effect on Portugal and Ireland, followed perhaps by Spain and Italy," said Spencer.

Item predicted a rise in business investment of 8% and 12% in 2012, but said those levels remained well off the peaks.

"The uncertainty about Greece and the EU periphery will continue to act as a damper on business investment in the UK, long held up as one of the torches that would light the way to recovery," Spencer added.

He pointed out that UK inflation running at 4.2% was also eroding consumers' spending power and directly affecting economic growth.