Downgraded: UK Growth 'Stalls Over Eurozone'

The UK economy has stalled due to fears over the eurozone debt crisis, a leading forecaster warned as it downgraded its GDP growth forecast.

Ernst & Young's Item Club has revised its predictions to 0.9% this year and 1.5% in 2012, from 1.4% and 2.2% respectively last July.

The group's latest quarterly forecast blames the fall on uncertainty across the eurozone and a slowing world economy.

It says this is undermining business confidence and investment decisions - but goes on to predict growth in the eurozone of 1.6% this year and UK growth of 2.5% in 2013.

The report also says the Bank of England's injection of an additional £75bn of quantitative easing is unlikely to put the recovery back on track.

Peter Spencer, chief economic advisor to the 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.

"With the UK recovery grinding to a halt, new measures are now needed to help stimulate growth.

"We think there is scope for targeted tax reliefs 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."

According to the report, business investment will be flat this year and exports will increase by just 6%, much less than was expected three months ago.

And another gloomy forecast came in the form of the Item Club's projected UK unemployment rate, which it said would increase to 2.7m by the spring of 2013.

Mr Spencer said the Government should cut employers' National Insurance contributions in a bid to boost the job market.

"With the public sector cuts starting to feed through in the UK, it's vital that the private sector labour market continues to stay afloat," he added.