The economy faces a near 50 percent chance of sliding back into recession, even if euro zone policymakers succeed in finding a solution to the bloc's debt crisis, the National Institute of Economic and Social Research said on Thursday.
If euro zone policymakers merely muddle through, the chance of a recession would rise to 70 percent, the academic think tank predicted.
NIESR's central forecast is for gross domestic product to grow by just 0.9 percent this year and 0.8 percent next, with risks to the downside, revised sharply down from forecasts of 1.3 and 2.0 percent respectively it made in August.
There is a weakness in demand from both consumers and investors but the main downside risk is from the euro zone crisis, said NIESR's director, Jonathan Portes.
European leaders announced a deal last week to help reduce Greece's huge debts and put an end to a two-year debt crisis that has raged across the bloc but a shock call from Athens for a referendum stoked fears that the plan would crumble.
The government has embarked on its own tough austerity drive to pay off a deficit running at nearly 10 percent of GDP by 2015, but the slowing economy makes this an increasingly difficult task.
Chancellor George Osborne acknowledged on Tuesday that the country faced a rough ride but reiterated his commitment to erase the record budget deficit.
The impact of the government's tough fiscal policy has been negative. Going forwards they should loosen policy moderately to help growth, Portes said, reiterating NIESR's long-standing criticism of government policy.
Even with the slower growth, NIESR predicted that the government was on track to run a surplus on its current budget -- which excludes investment -- by 2016/17. This is two years later than the government's fiscal watchdog forecast in March, but still in line with the government's rolling five-year target, NIESR said.
The Bank of England has already launched a second round of quantitative easing, pumping an additional 75 billion pounds into the economy, and policymakers have warned that the country risks slipping into another recession.
Data released on Tuesday showed the economy grew 0.5 percent last quarter, its strongest showing in two years, but economists see weaker growth ahead and gave a median one-in-three chance the country will head into another recession in the next 12 months.
A Reuters poll taken last month predicted growth of 1.0 percent in 2011 and 1.3 percent in 2012 and the government's own forecasters are expected to have reduced their estimates.
NIESR also backed the Bank's prediction that consumer price inflation would fall rapidly from its current three-year peak of 5.2 percent, averaging 2.3 percent in 2012.
(Reporting by Jonathan Cable)