That is below the government's official forecast of 1%-1.5% growth in 1999.

And manufacturing is likely to go into a full-blown recession, with manufacturing output falling 1% during the year.

Further weakness in exports will cut the growth in the value of the goods and services the UK produces by 1% this year and 0.75% next year.

Confidence falling fast

But the biggest risk to the economy, say the forecasters, is the collapse in business and consumer confidence.

"It is the abysmal state of domestic confidence, rather than of any fundamentals, that poses the main threat of recession," the report said.

It forecast a sharp slowdown in domestic demand next year, falling from 4% to 1.5% as worries about job losses affect consumers.

Falling interest rates

The report suggests that the Bank of England will be forced to cut interest rates again to boost growth in the economy.

Inflation is forecast to fall below the government's 2.5% target figure, despite the expected 5% rise in wages following the implementation of the minimum wage in April.

The report predicts the underlying rate of inflation will fall to 2.2%.

Weaker pound

Under the rules operated by the Monetary Policy Committee of the Bank of England, under-shooting the inflation target is just as bad as over-shooting.

In forecasts short-term interest rates of 6.2% in 1999, down from 7.3% this year.

The pound is forecast to fall to 2.67 to the German deutschmark, down from 2.80 this year.