The British economy is heading for a �significant downswing�, the world�s leading financial forecaster warned yesterday as it slashed predictions for global growth this year and next.

DOUGLAS HAMILTON and DAMIEN HENDERSON

The British economy is heading for a "significant downswing", the world's leading financial forecaster warned yesterday as it slashed predictions for global growth this year and next.

The Paris-based Organisation for Economic Co-operation and Development (OECD) outlined a toxic mix facing the UK of rising inflation, slowing growth, and increasing unemployment.

Amid weakening house prices and tighter credit conditions, the British forecasts for increases in gross domestic product were cut from 2% to 1.8% this year, and from 2.4% to 1.4% in 2009.

The OECD's half-yearly outlook also said the Government was at risk of breaking its own "golden rule" of sustainable investment, and criticised Labour ministers for "excessively loose" fiscal policy over the past 10 years.

The forecasts give an even bleaker picture of growth than those forecast by the Bank of England's last report, and spell potential disaster for Gordon Brown on the domestic front as it leaves him little leeway to offer big tax cuts to disgruntled voters at the next General Election, due by May 2010.

Opposition politicians leapt on the report as evidence of the Government's economic mismanagement.

Philip Hammond, Shadow Chief Secretary to the Treasury, said the Prime Minister had "failed to fix the roof when the sun was shining ... He borrowed in a boom, leaving us with the largest budget deficit of any industrial economy."

Vince Cable, for the LibDems, called the report "truly awful news" for Mr Brown. "Instead of just drifting, ministers should plan ahead to mitigate the worst effects of the coming slowdown. The Government must ensure we do not get the spiralling repossessions we saw during the Tory recession of the early 1990s," he said.

The OECD said the Bank of England should hold-off from further interest rate cuts to stimulate the economy as soaring inflation pressures persist, urging the Monetary Policy Committee which will decide today on the latest rate, to consider gradual reductions, possibly not until next year.

It forecast that unemployment would rise from 5.4% of the UK workforce in 2007 to 5.5% this year and 5.8% next year, and warned that the economic outlook could worsen.

Its report said: "GDP growth is weakening while inflation rises, and there is a risk that they drift even further apart than projected. For example, GDP growth could slow more markedly if financial sector health continues to deteriorate or if the housing market falls into a more significant slump, while high inflation expectations pose upside risks to inflation."

It blames US economic fallout for much of the problem, forecasting a second-quarter contraction in the American economy and just 1.2% growth for 2008 overall, and says Britain is suffering alongside most European countries and Japan.

But potentially damaging to the Government is the prediction that it risks breaking its own sustainable investment rule by seeing debt rising above 40% next year - the cap for the national deficit.

The OECD, which highlighted the shift in global economic power towards fast developing nations such as China, Brazil, India, and oil-rich Russia, said the downturn in Britain would reduce the amount of tax revenues collected by the Government.

"It is clear that much tighter fiscal policy will be required in the future.

"While ongoing economic weakness in 2009 would argue against fiscal restraint, the Government's options have been limited by excessively loose fiscal policy in past years when economic growth was strong."

City analysts broadly agreed. Alan Clarke, from BNP Paribas, said: "The Chancellor's public finance forecasts were looking optimistic even when he made them. Now the growth outlook has deteriorated they are looking even worse."

A spokesman for the Prime Minister said he did not agree with the OECD's assessment. "The Government is committed to its fiscal rules, the Treasury will be providing an update of their fiscal forecasts in the pre-Budget report (later in the year)."