Credit crunch is expected to trigger halving of growth and squeeze on City revenue

Consumers, investment and the housing market will suffer next year as turmoil in the financial markets could cut economic growth by almost half, an economic forecasting group says today.

The report by the Centre for Economics and Business Research (CEBR) comes as many analysts forecast that the Bank of England could cut interest rates as early as November.

In its latest outlook for Britain, the CEBR has revised its prediction for growth next year down to 1.4%. The economy is currently growing at 2.7% a year.

"What we see for the next two years is a bit of a double whammy hit on economic growth," says Jonathan Said, senior economist at the CEBR, "first from the financial markets in 2008 and then from the Asians taking the foot off the gas in 2009."

The report says that the drying up of interbank lending is likely to affect economic growth in a number of ways. Consumer spending will be hit as banks clamp down on lending to people with poor credit history. This will also affect the housing market, reducing transactions by around 20%.

The CEBR says there will also be knock-on effects on business investment, which has already started to slow. The report forecasts a dramatic fall in investment to 1.6% in 2008 from 6.6% this year. "Some M&A [merger and acquisition] and private equity deals are likely to be postponed to the tail end of 2008," Mr Said warns.

As a result, the size of the financial sector, which accounts for a tenth of UK growth, is likely to be squeezed. "We expect the financial market crisis to mean the undoing of most of this recent growth [in the financial sector]," says Richard Snook, an economist at the CEBR.

Many other analysts are also revising down their forecasts for growth and interest rates. Although the US Federal Reserve cut interest rates last week and the Bank of England injected more liquidity into the money markets, analysts say it is too early to conclude that the crisis is over.

"Concerns over exposures to the US sub-prime mortgage market could mean that banks will remain reluctant to lend to each other for some time yet," said Roger Bootle at Capital Economics. "Even before the market turmoil, we thought that the economy would slow a bit more sharply than the monetary policy committee expected over the next year or so and recent developments have increased the downside risks. The upshot is that UK interest rates now look likely to fall rather sooner than we had previously anticipated. Should things fail to improve, the MPC could act as soon as November."