The recession will end this year, but Britain’s economy will endure a bout of stagnation, failing to grow at all in 2010 as the recovery proves weak and “sluggish”, the West’s leading official think-tank predicts today.

In a stark challenge to Alistair Darling’s optimistic forecast for Britain to rebound sharply in 2010 with growth of at least 1 per cent, the Organisation for Economic Cooperation and Development projects zero growth for the UK next year — although this is an upgrade to its previous warning of a continued contraction, by 0.2 per cent.

It also downgrades its forecast for this year to show a slump of 4.3 per cent in GDP, compared with its March projection of a 3.7 per cent decline, which was close to the Treasury’s worst-case scenario.

The OECD’s grim assessment deals a heavy blow to rising hopes in the City and the markets that Britain is on course to emerge faster, earlier, and more strongly from recession than some of its leading competitor countries.

In a further blow to the Chancellor, the Paris-based institution also sounds a warning that unemployment is likely to soar above three million during next year, while Mr Darling is set to confront a massive budget deficit £30 billion larger than he has already factored in to the Government’s financial plans.

The OECD’s economists caution that Chancellor that “public finances have deteriorated sharply”, and project that the Government will slide into the red by 14 per cent of GDP in the next 2010-11 financial year — equivalent to £203.5 billion, compared with Mr Darling’s already huge £173 billion forecast.

The think-tank says that this will leave the Treasury “little room for further fiscal stimulus” to boost growth that any tax cuts or spending increases if recovery falters.

The Chancellor is told to press ahead with plans to bolster stability by developing a “concrete and comprehensive plan to ensure that debt is on a declining path once recovery takes hold”.

However, the OECD sounds a wider warning to Western governments as a whole not to rush in to cutting deficits by raising taxes or through spending cuts, cautioning that too rapid action would risk choking off recovery.

In Britain, it says that a revival in the economy is being held back as financial conditions facing consumers and businesses after the credit crunch remain very tight, despite some improvement. “Economic recovery will require restoration of the financial system and the supply of credit,” it notes.

Its concern comes after The Times revealed today that there is mounting frustration inside the Treasury among ministers and officials over the Bank of England’s failure to do more to ease the flow of credit to smaller and medium-sized companies.

Recovery in the UK is also set to be hampered by further falls in house prices, only very weak growth in the incomes of workers, and the overall continuing weakness of the world economy, the OECD says.

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