THE Ernst & Young ITEM Club autumn forecast is predicting that GDP will increase by just 1.6 per cent this year - half the Treasury's forecast.

ITEM is cautiously predicting GDP growth of 2.2 per cent for 2006, but this is dependent on sustained growth in the world economy and a recovery in exports and investments.

Professor Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, explains: "The Chancellor is blaming the UK economic slowdown on the recent spike in oil prices and the weakness of the European economy, but this is unrealistic. The problems were plain to see at the time of last year's pre budget report in December, but instead of addressing them then the Treasury chose to dress up the UK finances for the election."

Prof Spencer adds that it was the failure to allow for the domestic risk that explains the error. He says: "The UK is actually in a unique position to benefit from high oil prices and given the strength of the world economy, external factors cannot be blamed for the Treasury's forecasting errors. The problem is actually home-grown, born out of a booming housing market and strong consumer spending, which has propped up the UK economy - until now."

Consumer spending on the high street continues to slow and is likely to remain subdued well into next year.

"The personal sector has to rebalance through savings - which are not as strong as we had previously thought - and this will take time," says Prof Spencer.

However, while some consumers have over-extended themselves and personal bankruptcies have increased, the household sector remains robust, with wage increases well ahead of inflation, according to Prof Spencer. The housing market, despite a mixed picture across the UK, is also looking stable.

As consumer spending slows all eyes are on business to take up the slack.

Prof Spencer said: "Despite a rise in the stock market and the world economy putting in its best performance in a generation last year, domestic business has been slow to react to the upturn. UK exports have lagged behind world trade and investors have not responded to the increase in production."