Predictions of a UK recession are unjustified, but interest rates must fall to halt a slowdown, the British Chambers of Commerce (BCC) warned today.
The UK BCC Economic Survey for the fourth quarter of 2007 revealed both the manufacturing and service sectors slowed.
"Overall, the survey results are negative. The critical balances for both manufacturing and services have fallen, with exports being of particular concern," said David Kern, economic adviser to the BCC.
"The pressure many firms are feeling on pricing show inflationary pressures that may be hard to keep a lid on."
However, he said talk of a recession was "unjustified and must be strongly resisted".
Mr Kern went on to call on the Bank of England for an interest rate cut.
"Inflationary concerns cannot be shrugged off, but a small interest rate cut early in 2008 will alleviate the credit squeeze, prevent a major confidence loss, and reduce the need for dangerous emergency measures later in the year," he said.
However, Paul Dales, UK economist at Capital Economics, was more optimistic about the threat of inflation, predicting retailers would cut profit margins rather than up prices, as consumers cut back spending.
He said: "We think a slowdown in activity on the high street will force retailers to take the hit in their margins.
"Overall, whilst growing evidence of rising price pressures is unlikely to prevent interest rates from falling further, it supports our view that the MPC will continue to loosen policy at a gradual pace."