HIGH oil prices will knock Britain’s growth rate next year for the second successive year, forecasters say, pushing the economy even further away from Gordon Brown’s growth predictions.

Professor Peter Spencer, economic adviser to the Ernst & Young Item club, which uses the Treasury’s model of the economy, said growth could slip below 2% next year if oil prices stay high.

“The Treasury model shows that every $10-a-barrel rise in the oil price hits the growth rate by 0.5%,” he said. “We could very easily get sub-2% growth next year.”

Oil prices hit a new record of $68 a barrel last week, before closing slightly lower. In London on Friday the price of Brent crude closed at $64.87 a barrel, while in New York, West Texas Intermediate crude closed at $66.13.

Other economists warn that the slowdown in the economy is no blip. Jonathan Loynes of Capital Economics, a consultancy, predicts 1.7% growth this year and 2% next. Brown’s forecast is for 3% to 3.5% this year and 2.5% to 3% in 2006.

“The main reason behind the slowdown is the weakness of household spending but the other parts of the economy, notably the corporate sector, can’t compensate for it,” he said.

Michael Dicks of Lehman Brothers, an investment bank, said Britain was going through a “broad-based slowdown” that would cut growth to just 1.8% this year and 1.7% next. As well as missing his growth forecasts, the chancellor will be off-target when it comes to borrowing, the firm warns.

Compared with a budget forecast of £32 billion for government borrowing this year, 2005-6, it predicts £40 billion. Next year, in the absence of tax hikes, borrowing will hit £46 billion, £17 billion above the Treasury’s forecast, it predicts.

That will pose a dilemma for Brown. He will not want to raise taxes when the economy is weak, and because of the political damage it would inflict on him. But the further above target that borrowing gets the less credible will be his fiscal rules.

Organisations have been slashing their growth forecasts for this year over the summer, following revised official data and a slowdown in consumer spending. The CBI said on Wednesday that the economy would grow by only 1.9% this year, barely half the chancellor’s forecast and the weakest performance for 13 years. Earlier in the week the British Chambers of Commerce also scaled back its forecast, to 2%.

Figures on Friday showed that gross domestic product grew by an upward-revised 0.5% in the second quarter but was only 1.8% up on a year earlier. Consumer spending rose just 0.2% during the quarter, following a 0.1% first-quarter increase.

Figures this week will be scrutinised for evidence on the strength of the household sector. The CBI will release its August distributive-trades survey and Nationwide building society will publish its latest monthly house-price index.

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax