A respected think-tank has drastically slashed its forecast for the UK's economy as it predicted a 0.7% fall this year, having previously expected a rise of 0.5%.
The Organisation for Economic Co-operation and Development (OECD) forecasts that the UK will fail to pull out of its double-dip recession in the current quarter, which will see a 0.7% decline on an annualised rate.
Its 2012 forecast is significantly worse than the 0.5% expansion it predicted last year, when it slashed its forecast from growth of 1.8%. The UK is predicted to be the worst performing G7 nation apart from Italy in the year.
However, it warned that its forecast does not take into account the effects of the Olympics, which many expect to provide a boost to the economy through an increase in tourism and spending on the high street following TeamGB's success.
The OECD predicts the UK economy will not return to growth until the final quarter of the year, when it will expand marginally. The Paris-based organisation, which works to improve social and economic wellbeing across the world, warned that the worsening eurozone debt crisis is dragging on the entire global economy.
The Prime Minister's official spokesman said: "Those figures demonstrate what we know which is that these are very difficult times in the world economy. The OECD highlights the euro area crisis as the single biggest global economic risk and in addition to that problem the UK is dealing with some deep-rooted issues at home. All the evidence shows that recovery from financial crisis takes a long time and there is no doubt we still have an impaired banking and financial system in this country. Clearly it is going to be difficult for us in this country while there are continuing problems in the eurozone."
The OECD suggested that countries suffering weak growth should cut interest rates if they are above zero and said money printing programmes could be expanded. And it called for more policy action to instil confidence in the eurozone, which it said remains "the most important risk for the global economy". The European Central Bank should lower interest rates on its marginal lending facility, it suggested, while it could also intervene in bond markets to help lower Spain and Italy's borrowing costs.
The organisation's chief economist Pier Carlo Padoan said: "Our forecast shows that the economic outlook has weakened significantly since last spring. The slowdown will persist if leaders fail to address the main cause of this deterioration, which is the continuing crisis in the euro area."
The report suggests that the eurozone crisis is now spreading to the currency bloc's core countries of Germany and France, which have previously helped prop up the weaker debt-ridden states in the periphery, but will slip into recession in the second half of 2012. Highlighting the dire state of the eurozone, it predicts the currency bloc's three biggest economies - Germany, France and Italy - will contract by an annualised rate of 1% in the current quarter and nearly as much in the next quarter. Its grim forecast came on the day that official figures confirmed that eurozone GDP contracted by 0.2% in the second quarter of 2012, after zero growth the previous quarter. And the OECD warned there are further risks for the world economy posed by potential rises in oil prices and the lack of confidence caused by persistent unemployment.
Shadow chief secretary to the Treasury Rachel Reeves said: "These very concerning forecasts show just how badly the Government's economic policies have failed. Britain's growth forecasts have been slashed by more than any other major economy. And while ministers desperately try to blame all our problems on the eurozone crisis, the OECD says France and Germany are doing better than us. In fact, Britain is one of just two G20 countries in a double-dip recession. David Cameron and George Osborne need to stop clinging on to their failed economic plan and change course now. Without a serious plan for jobs and growth, we won't get the deficit down and yet more long-term damage will be done."