Britain can still avoid a renewed recession despite the deepening turmoil in the euro zone, a leading business lobby said Wednesday, though the weak recovery will drive up unemployment over the coming year.
While the group suggested a number of measures to boost growth, it warned the government against moving away from its pledge to erase the country's huge budget deficit.
A slew of grim news from the economy has increased fears of a recession, and the Bank of England has already launched a fresh round of quantitative easing to support the recovery.
In its latest economic forecast, the Confederation of British Industry (CBI) cut its forecasts for British growth to 0.9 percent this year and 1.2 percent the next, from the 1.3 percent and 2.2 percent respectively it predicted in August.
While the risk of a double dip has certainly risen, it's still not our central forecast, CBI chief economic adviser Ian McCafferty said.
Our view is that although the recovery has lost significant momentum, the UK will scrape through this difficult period.
Britain's economy -- which grew by 0.5 percent between July and September -- was particularly vulnerable to weaker demand for its exports in Europe, its major trading partner, because domestic demand was held back by pressured household incomes and public spending cuts, the CBI said.
The group predicted that unemployment would continue rising in 2012, peaking that year at 8.5 percent.
Joblessness in Britain already stands at 8.1 percent, the highest rate since 1996, as private companies fail to make up for job losses in the public sector.
A survey for the Recruitment and Employment Confederation and accountants KPMG, also published Wednesday, showed that firms shed jobs in October, with the number of permanent placements falling for the first time in more than two years.
Nervous employers are placing recruitment decisions on hold amidst concerns over the economic outlook, in many cases choosing instead to plug gaps with temps, said Bernard Brown, head of business services at KPMG.
The CBI's forecast for inflation was more upbeat. It is expected to decline from its current rate of 5.2 percent, starting from the first quarter of next year, and reach the Bank of England's target rate of 2 percent in the first three months of 2013.
The central bankers themselves have said inflation will drop sharply next year as one-off effects, such as rises in value-added taxes and high oil prices, drop out of the equation and the economic weakness dampens wage and price increases.
In the latest confirmation of this forecast, a survey showed that British retail inflation eased to its slowest pace this year in October as retailers stepped up the price battle to lure cash-strapped consumers.
The CBI also published proposals, aimed at boosting growth and confidence without endangering the government's deficit-reduction plans, that it would like the finance minister to consider ahead of his key statement on the economy on November 29.
Given the uncertain economic outlook and the overriding need to sustain market confidence in the UK, I don't think that spending money we don't have is an option, CBI Director-General John Cridland said.
Instead, we need to find other and more imaginative ways of revitalising growth and creating what I call a Plan A plus.
The CBI suggested infrastructure initiatives and three further measures, at a cost of up to 500 million pounds a year: help for Britain's energy-intensive companies such as those in steel and chemicals sectors, stimulating the housing market and tackling youth unemployment.
(Additional reporting by Sven Egenter and Jonathan Cable; editing by Ron Askew)