The International Monetary Fund today cast doubt on Chancellor Alistair Darling's growth forecasts this year and raised fears that the slowdown in the housing market could gather pace.
The UK's economy will grow by just 1.6per cent in 2008 - half the rate seen last year and well below Treasury forecasts of between 1.75per cent and 2.25per cent - as the impact of US economic woes hits home, the IMF predicted.
The UK is also under threat from a sharper than expected fall in house prices as anxious lenders pull funding, according to the body's World Economic Outlook report.
"Several countries, including Ireland, the United Kingdom, and Spain, have experienced their own housing booms, and these are starting to turn.
"The slowdown in mortgage lending could accelerate the so-far gradual adjustment of housing prices in a number of countries with elevated valuations," the IMF said.
The body also warned global growth would lose speed following the financial crisis and expects the US to enter a "mild recession" this year as the trauma in the world's largest economy is felt worldwide.
"Emerging and developing economies will not be insulated from a serious downturn in the advanced economies," the report added.
The more pessimistic forecast compares with the IMF's October prediction of 2.3per cent growth for the UK economy this year.
But commenting on the IMF's report, Chancellor Alistair Darling stuck by his growth forecasts today and said he remained "optimistic".
He told BBC Radio 4's Today programme: "The IMF has downrated every country's growth forecast in the light of what's been happening in the world economy.
"However, they have lowered their expectations in relation to us by less than other countries."
He added: "We do have a very strong economy, it has proved remarkably resilient over the years."
The gloomy IMF forecasts came as the Government today appointed a former bank chief to lead a working group aimed at tackling the crisis in the mortgage market.
Sir James Crosby, former chief executive of Halifax Bank of Scotland, will work with lenders, the Bank of England and the Treasury to "reopen" a market constrained by the global crunch.
With banks reluctant to lend to each other in the current turbulence and a fall in the number of mortgages available in the UK, Sir James will be charged with finding ways to get more money into the system.
The move was announced by Mr Darling who said Sir James, deputy chairman of the Financial Services Authority, will seek a market-led solution to the problem.
The Chancellor said: "The recent and ongoing disruption in global financial markets has raised complex issues about the functioning of the mortgage-backed securities markets.
"This work will be an important contribution to stabilising the cost and supply of UK mortgages."
Sir James's working group will present an interim report to the Chancellor this summer and a final version at the time of the 2008 Pre-Budget Report.
The housing market, one of the key drivers of growth in the UK, has come under pressure due to problems in the mortgage sector.
Figures from the Council of Mortgage Lenders (CML), released yesterday, showed the number of mortgages taken out fell for the fourth month in a row during February to just 49,000.
Meanwhile, the number of mortgages available continued to fall, with Abbey striking a further blow to hard-pressed first-time buyers with the announcement that it is pulling out of the 100per cent mortgage market.
Figures from Halifax yesterday also showed the price of the average home falling by 2.5per cent last month.
Shadow Treasury chief secretary Philip Hammond said the IMF report "adds to the growing evidence that Gordon Brown's economic incompetence has left Britain badly prepared" for the current difficulties.
He said: "This reputable international body has undermined the forecasts the Chancellor made just a month ago.
"And in the face of this urgent economic crisis, all the Government can do is dither and delay and launch yet another review.
"To support the housing market and help maintain consumer confidence, he should be cutting stamp duty for first time buyers, instead of increasing taxes on the low paid."Reuse content