Growth will wane from 3.1 per cent last year to 2.7 per cent this year, the National Institute of Economic and Social Research (NIESR) forecasts today. Treasury predictions are for growth of between 3 per cent and 3.5 per cent in 2005.

The institute predicted that house price inflation will slow from 11.5 per cent in 2004 to 1.5 per cent this year, and said that would have a knock-on effect on housing wealth, causing consumers to rein in expenditure.

Household spending will slow from 3.3 per cent growth last year to 1.8 per cent this year, the institute believes. That would push the savings ratio up but would cause overall growth to moderate from its above-trend pace last year.

The report said the Treasury was unlikely to collect as much tax revenue as it hoped, in part because of the lower rate of growth. The resulting revenues would be insufficient to balance the current budget, and the institute forecast that the cumulative public sector current budget would be in deficit by 0.3 per cent of GDP at the end of 2005-06, when the current economic cycle is expected to end.

That would break the Chancellor’s “golden rule”, which is for the current budget to be balanced or in surplus by the end of the cycle. The chances that the golden rule would be broken unless the Government intervened were two in three, the institute said.

Fiscal tightening, either through raising taxes or cutting spending, would probably be needed before next year.

The report also predicts that government spending and business investment will grow this year, as will exports. Export growth is expected to overtake import growth by next year, turning net trade positive and improving the prospects for overall growth considerably.

Growth in 2006 would be 2.8 per cent, NIESR said, in line with Government forecasts.

Interest rates are unlikely to be cut this year, it added. It expects rates to rise again as the tightness of the labour market encourages wage inflation to rise. The consumer price index is expected to reach 2.2 per cent, slightly above the Bank of England’s target. Growth worldwide is poised to slow, according to NIESR’s forecast for the world economy.

• Manufacturers are at their least optimistic about future conditions for two and a half years, according to a survey released today. The NTC Business Outlook Survey shows that 60 per cent of companies expect to see an improvement in business activity over the next year, while 13 per cent expect to see a decline. The resulting balance is the lowest since the survey began in mid-2002.

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