On Wednesday, the Organisation for Economic Cooperation and Development said that a fall in of around 10 per cent by the end of 2009 will slow Britain’s growth rate significantly and make the economy more vulnerable than most to the global credit crisis.

The organisation expects the economy to grow by 1.8 percent in 2008 and 1.4 percent in 2009, a projection that falls in line with the Bank of England’s latest central forecasts, but far more pessimistic than the Treasury.

The OECD continues to support the Bank’s generalised strategy of allowing the economy to suffer a protracted slowdown to squeeze inflation out of the system and advised the bank to keep interest rates on hold for the remainder of 2008.

However, it disagrees strongly the Bank of England on the effect of house prices on the economic outlook. The OECD believes that the UK is one economy apart from the US where a large fall in house prices would severely curtail economic growth.

OECD’s acting chief economist, Jørgen Elmeskov, said that the OECD had looked very closely at the underlying forces influencing consumptions and always found house prices and mortgage equity withdrawal to be significant.

“This could just be a coincident, but at the end of the day there have been too many such coincidences,” Mr Elmeskov said.

The OECD expects the economy to recover more slowly than the bank in 2009, and believe this creates the need for three interest rate cuts next year once it is clear that inflation is falling and that economic activity has slowed appreciably.

The OECD said the projected weakness in the economy also put the government’s fiscal rules in jeopardy. It forecasts in the twice-yearly Economic Outlook suggest that the government’s sustainable investment rule could be breached in 2009.

The organisation puts the blame for the weakness in the budget firmly at the government’s door. . “While ongoing economic weakness in 2009 would argue against fiscal restraint, the government’s options have been limited by excessively loose fiscal policy in past years when economic growth was strong,” it said.