Forecaster: UK economy 'worse than we thought'

Ernst & Young has downgraded its forecast for UK gross domestic product (GDP) to just 0.9% this year - significantly below the 1.4% it predicted three months ago - as it described the economic situation "worse than we thought".

The independent forecaster's Item Club, which calculates GDP using the same measures as the government, said growth should pick up to 1.5% in 2012, but this too remains well under its previous 2.2% estimate for next year.

Earlier this month, official figures showed the UK economy grew by 0.1% between April and June, less than the 0.2% estimated previously.

Ernst & Young said the economy may need new growth measures to get back on track as global uncertainty - particularly in the eurozone - had frayed business and investor confidence.

However, it said it did not believe the coalition government's latest bout of quantitative easing (QE) would be the answer.

It thinks further action should include cutting interest rates to 0.25% from their current record low of 0.5%, and a cut in stamp duty for first-time buyers.

Peter Spencer, the chief economic adviser to the Ernst & Young Item Club, said: "It's worse than we thought. The bright spots in our forecast three months ago - business investment and exports - have dimmed to a flicker as uncertainty around Greece and the stability of the eurozone increases.

"We think there is scope for targeted tax relief and spending measures to help put us back on track. In the meantime, businesses need to be much more aware of the economic risks and have contingency plans in place given the current volatility."