The CBI has reduced its forecast for the UK economy in 2008 amid growing concerns of the impact the credit crunch and a cooling in the housing market could have.

The business group had predicted growth of 2.2% as recently as September but has now downgraded that forecast to just 2%, its third consecutive downgrade.

It also believes inflation will continue to rise next year due to higher food and oil prices, hitting 2.6% by the end of 2008 and making further interest rate cuts unlikely.

But the body rejected talk of a full-on recession. "While the 2008 slowdown may appear dramatic set against this year's strong growth, the fundamentals of our economy remain sound and talk of a full-blown recession is overstated," said chief economic adviser Ian McCafferty.