Rising fuel prices and the continued uncertainty surrounding financial markets have forced the CBI to cut its forecast for UK economic growth.

The body said it now expects that GDP will only grow by 2% next year, which is 0.2% down from its September estimate, and is the third successive quarterly reduction it has delivered.

The CBI said that the credit crunch has already dented consumer confidence, while rising oil, gas and food prices will see inflation hit a peak of 2.6% in 2008, which is considerably above the Government's target of 2%.

And the slowdown in economic growth is also expected to have an effect on unemployment. Previously the group had said that the number of people out of work would fall next year, but it is now predicting that unemployment will rise to 1.7 million.

The forecasts are likely to worry the Bank of England, which cut interest rates by 0.25% earlier this month amid signs that economic conditions were getting worse.

The CBI said that it believes the Bank will be forced to cut rates further in the new year, and added that a third cut may also be required in order to ease pressure as the economy cools.

Despite the new report, Ian McCafferty, CBI chief economic adviser, said talk of a full blown recession is "overstated".

"Uncertainty surrounds the extent to which current credit conditions will affect both business and consumer confidence and how far the property markets will suffer. Borrowing conditions are already tighter for some households and businesses."

He added that the cost of oil is another key factor. Prices have risen by 20% since September and crude prices almost reached 100 US dollars a barrel in November.

"A prolonged period of high oil prices will add to inflationary pressures, whilst putting a squeeze on profits and discretionary spending, compounding the slowdown," he said.

The CBI also revealed that it expects consumer spending to slow more sharply than originally thought, with growth falling from 3.1% this year to 1.9% in 2008, while investment by companies will grow by just 1.8%, compared with 5.7% in 2007.

Copyright © PA Business 2007