BRITAIN’s housing market will not crash, despite the prospect of a slowdown in the economy next year, according to the Ernst & Young Item Club’s new forecast for the economy.

Its forecast, using the Treasury’s model of the economy, predicts that the credit squeeze will slow the economy to 2.1% growth next year – down from 2.5% in its June forecast – compared with an annual growth rate of 3.3% in the third quarter.

But it takes issue with the International Monetary Fund, which last week warned that UK house prices could be heading for a significant fall.

“Item does not believe that the tighter lending conditions for homebuyers will lead to a serious correction in UK house prices,” the report says. “With the labour market strong, it is unlikely there will be a major housing recession.”

Fears of a slowdown in the world economy were fuelled by sharp drops in American markets on Friday. The Dow Jones index fell 370 points to 13,522. It was pushed down by rising oil prices and continued weakness in the dollar, and by a disappointing set of results from Caterpillar, the construction equipment company seen by some as a bellwether of US industry. Other American markets fell by about 2%.

G7 finance ministers and central bankers discussed the credit crisis in Washington on Friday. Alistair Darling, the chancellor, called on oil producers to boost output and bring down oil prices from their record levels of close to $90 a barrel.

Item’s view of the UK outlook is backed up by a survey of City economists carried out by Idea-global.com, the financial research company. While the median expectation was for a sharp slowdown in house-price inflation next year, to just 1% by the fourth quarter, none expected an outright fall, the range running from zero to 5%.

The economists surveyed also said there was a 25% chance of a cut in Bank rate next month, following last week’s “dovish” minutes from the Bank of England’s monetary policy committee.

Peter Spencer, Item’s chief economic adviser, said that, although he was still concerned about developments in America, the credit crisis could act as a “timely tightening”, taking the heat out of growth in those parts of the financial sector that were growing too fast and contributing to a rebalancing of the economy.

Consumer spending will slow from 3% to 2%, Item believes, but Spencer said consumers were holding up very well in the light of the blow to confidence from Northern Rock. He was sceptical about early cuts in interest rates. “The economy is still growing at a stonking pace,” he said. Companies in the UK waste about 18% of all working time through inefficient use of labour, the equivalent of 40 working days per employee per year, according to a new international study from Proudfoot Consulting. The 2007 Proudfoot Productivity Report also found that Germany had bounced back strongly in terms of labour productivity over the past two years.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts