The British Chamber of Commerce cut its growth forecasts for the UK for this year and next and said the weaker-than-predicted economy means interest rates will have to stay low longer than expected.
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Tower Bridge and City of London financial district
UK gross domestic product is expected to expand by 1.1 percent this year, compared with a previous 1.3 percent forecast, and by 2.1 percent next year, down from 2.2 percent previously, the BCC said in a statement.
However, growth will pick up at a rate of 2.5 percent in 2013, said the BCC, which also warned against "unjustified gloom about the UK's economic prospects."
Unemployment will peak at 2.62 million in the fourth quarter of next year, while UK public sector borrowing will be 126.9 billion pounds (US$234.6 billion) in 2011/2012, 5 billion pounds higher than forecasts from the Office for Budget Responsibility, according to the BCC's report.
"Lower growth prospects, both globally and in the UK, mean that official interest rates will need to stay at very low levels for longer than previously envisaged," the BCC said in a statement.
Rates are expected to start rising in August next year, reaching 1 percent in the fourth quarter of 2012 and 2.25 percent in the forth quarter of 2013.
Despite low growth coupled with high inflation and unemployment, David Frost, director general of the British Chambers of Commerce, said he expected prospects to improve over the medium term, with net exports and business investment the main drivers for growth.
"We have to get the economy onto a more sustainable long-term footing, and it is business that will help us achieve that," Frost said in the statement.
To do that, the government will have to take "a serious look at the infrastructure that supports our business" as well as cut bureaucracy to allow companies to grow, he added.
"If we don't get these policies right, we risk any recovery being weak and short-lived," Frost said.