A looming consumer crunch will cause household spending growth to grind to a halt this year and leave Britain’s economy in “its most precarious position in over a decade,” the country’s leading economics institute says today.

After acting as the main engine of growth since the early 1990s, consumer demand is set to hit the buffers in the second half of this year, with household spending stagnating at present levels, the National Institute of Economic and Social Research predicts.

Britain faces a painful two-year stretch of economic weakness and lacklustre growth as the excesses of the recent consumer and housing boom are worked off, the institute says.

In its latest quarterly forecasts, the institute says that the economy will grow by only 1.8 per cent this year and next. It has cut its forecast for 2009 by half a percentage point in the latest challenge to the Chancellor’s rosy view that the economy will rebound strongly after an anaemic 2008.

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A retreat by hard-pressed consumers from shops, bars and restaurants is set to be the key driving force behind the economy’s downturn.

Consumers are set to curb their past high-spending habits and boost savings as households are hit by falling house prices alongside an intense squeeze on borrowing as the credit crunch tightens lending conditions, it concludes.

Growth in consumer spending is forecast to more than halve this year from 3 per cent last year to 1.2 per cent and then to halve again in 2009 to 0.6 per cent. The household savings rate is forecast to surge from 2.9 per cent last year to 6.5 per cent by 2010.

“The UK has been reasonably adept at weathering previous global storms. However, the unfolding news on the current shocks to the economy suggests that they will be more difficult to offset than others seen since 1997,” says the report.

Growth is also forecast to be underpinned by a markedly stronger export performance as the recent steep slide in the pound, the sharpest since sterling was ejected from the European exchange-rate mechanism on Black Wednesday in September 1992.

The prediction of better fortunes ahead for industry came as a key survey yesterday showed that new orders for manufacturers last month fell for a fourth month in a row, while export orders also continued to slide.

The CIPS purchasing managers’ survey showed that manufacturing continued to register small gains in output. However the CIPS survey also showed another month of record inflation in industry, with the cost of goods leaving factories at levels not seen since 1999 as industry grapples with soaring raw material and energy costs.

Despite the economy’s growing woes, the institute expects that persistent inflationary dangers, stoked by the weak pound, will mean that the Bank of England is able to move only slowly to bolster conditions with more cuts in interest rates.

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