Confidence among employers has fallen to its lowest level since 1996, according to the Institute of Directors.

Taken in conjunction with a report by the Ernst & Young Item Club, which forecast growth of just 1% in 2009, the news is gloomy reading for business owners hoping to avoid recession.

"The sharp fall in overall business optimism is very worrying and points towards a recession," said Graeme Leach, chief economist at the Institute of Directors. "But other results suggest we can still escape with a sharp slowdown over 2008-09."

The Item Club report predicted house prices would fall by 10% in 2008 and a further 6% the following year. It also forecast interest rates would have to fall, possibly to as low as 4% next year, despite the impact this would have on inflation.

"Both on the high street and in the housing market it is going to get a great deal worse before it gets better," said Professor Peter Spencer, chief economist at the Item Club.