Toucan

The world economy has entered its most dangerous phase in since the 1930s, according to a report.

The National Institute of Economic and Social Research (NIESR) has forecast reluctance of banks to lend could lead to the economy stalling.

The NIESR report predicts: "Growth will slow markedly from three per cent in 2007 to 1.8 per cent a year in both 2008 and 2009."

Gloomy predictions also cover a fall in consumer spending together with inflation rising up to the point where the governor of the bank of England will be forced to write a letter to the chancellor of the exchequer.

The report states: "Rising risk premia on lending and falling house prices will undermine consumer spending, which has remained surprisingly resilient in recent years despite the weakness of real disposable income growth.

"The slowdown will eventually curb inflationary pressures, but these remain worryingly intense at the moment. Import prices are rising rapidly because ofthe sharp depreciation in the pound."

Although income growth is predicted to pick up in the coming year, private consumption will "slow to a crawl" this year and next, as savings ratios rise.

Globally, the world economy is expected to grow 4.2 per cent in 2008 – down from 4.7 per cent in 2007 – largely supported by the resilience of Asian economies as the US and Europe slow.

"As the most serious credit crisis since the early 1930s unfolds, an extreme outcome in braking the global economy, including a recession in the OECD, cannot be excluded," the NIESR report finds.

"However, progressively more ambitious attempts by the world's main central banks to forestall the potential fall-out have lessened the danger.

"While the US and the euro area feel the pain of the credit crisis, Japan will ride out the storm. Japanese banks, still scarred by the banking crisis of the 1990s, did not participate in the risky behaviour of European and American banks that has backfired so spectacularly."

Yesterday's report from the Bank of England also predicted a worsening of the credit crisis if banks continue to overrate risk and refuse to lend.

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