Continuing problems in the credit markets will cause the UK's economic slowdown to last well into 2009. That is the prediction of economists at the Confederation of British Industry who have downgraded their growth forecasts for this year.

In its latest quarterly economic forecast published today, the business group has cut its figure for this year's rate of GDP growth by 0.2 percentage points to 1.8%.

CBI director-general Richard Lambert said: "We were already facing a slowdown in the economy over the next couple of years. On top of that we are facing a financial crisis the scope of which we haven't seen in recent times."

Ian McCafferty, the confederation's chief economic adviser, added that a long-anticipated economic slowdown this year will continue into next year as consumers are buffeted by rising prices and less credit, and corporates find they cannot pass their cost increases on.

"It is as much a 2009 story for economic growth and the corporate sector than it is for this year," he said.

He added: "If credit markets continue to be gummed up there will, I think, be a significant impact on the real economy and that will persist for some time even when the credit markets begin to reopen."

The group now sees economic growth for 2009 of just 1.7%. This contrasts with Chancellor Alistair Darling's prediction of 2.2% to 2.75% growth as he anticipates the economy picking up again.

McCafferty said the credit crunch was a "prevailing headwind that will hold back any recovery in the economy until well into 2009 and will put some constraints on the economy for some time thereafter".

He added: "The impact of the credit crunch prolongs rather than sharply deepens the slowdown already under way."

Lambert said that the businesses outside the financial and property sectors were in strong shape, that many companies were sitting on healthy balance sheets and would be able to finance their cash needs out of profits instead of bank debt.

But McCafferty added that many companies used to ballooning profits would have to settle for leaner times.

"The economy as a whole over the past five or six years has become accustomed to a relatively rapid period of growth. Even a slowdown that avoids a technical recession is going to feel very difficult. For the business sector it's going to mean a significant squeeze on profit margins. Business cannot pass on all the increases in their costs from energy materials or whatever."

There is also likely to be a spike in inflation, the CBI reckons, rising to a peak of 3.2%, as measured by the consumer price index, in the third quarter of 2008. Such a level would require Bank of England Governor Mervyn King to write a letter to Alistair Darling explaining his failure to hit the bank's 2% inflation target. The CBI then expects infla-tion to slow sharply as the economy contracts so that it reaches that 2% level by around 2009.

"High commodity prices are adding to inflationary pressures and significantly squeezing household incomes. And some households are feeling a chill from the credit squeeze with lending conditions becoming tighter," McCafferty said.

The CBI anticipates one interest rate cut before inflation peaks with another two afterwards to take rates to 4.5% by the first quarter of 2009.

The employers' body has slashed its forecasts on household spending, given rises in food and energy prices. Household consumption growth is forecast to slow from growth of 3.1% last year to 1.6%, down 0.3% on its previous forecast in December. This could slow even further to 1.1% in 2009.

But there is good news for exporters. The CBI's forecast for net trade has improved for 2008 and 2009, with exports growth of 3.8% predicted this year and 5.5% next year. This contrasts with import growth of just 2.2% and 3.3% respectively as goods get more expensive.