Britain's economy could be set back by five years as the current downturn deepens, a leading think-tank has forecast.

In one of the gloomiest predictions yet for the UK's finances, the Centre for Economics and Business Research (CEBR) predicts that the economy could shrink by more than 2.5 per cent next year as bank lending continues to stagnate.

That would be the biggest slump since 1946 when the UK was wrestling with the aftermath of the Second World War and a freezing winter.

Several analysts have recently made predictions of a 2.5 per cent fall in GDP next year - representing the worst annual performance since 1947.

But CEBR managing economist Ben Read said in an interview: "It is easy to see that things could be even worse.

"Despite public declarations by the Government that the banks ought to be lending more, it is clear the primary concern of many of our largest banks is to shore up their balance sheets and, for those on the end of government bailouts, to pay back their Treasury masters."

CEBR's economists are warning about the danger of firms cutting investment at the same time as consumers rein in spending and save more.

Mr Read added: "If this scenario occurs, a contraction of between 5 per cent and 10 per cent could be on the cards, setting the UK economy back by five years."

Earlier this week official figures confirmed the UK economy is sliding in to recession faster than first thought.

Revised data showed a sharper than expected 0.6 per cent fall in output between July and September - the worst since 1990 and bigger than the 0.5 per cent fall first estimated by the Office for National Statistics (ONS).

Chancellor Alistair Darling predicts the UK will return to growth in the second half of 2009 with stimulus moves funded by extra borrowing - such as the VAT cut -leading to a "shorter and shallower" slowdown than feared.

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