The British economy is expected to slow dramatically in 1998, reports from Oxford Economic Forecasting and Cambridge Econometrics said today.

Cambridge Econometrics believes growth will fall to 2.5 per cent next year and to 1.75 per cent in 1999 from 3.5 in 1997 whilst the Oxford report sees economic growth reduced to 2.1 per cent this year and 2 per cent next.

Oxford Economic Forecasting argues that one more increase is likely in Britain's 7.25 per cent interest rates, although it expects base rates to have fallen back to 6.75 per cent by the end of 1998 and to 6.25 per cent by mid-1999.

The Bank of England's monetary policy committee, which determines interest rates, meets this week but is expected to leave the cost of borrowing unchanged after contradictory evidence on the state of the economy.

Today's two forecasts provide contradictory expectations of the likely levels of consumer expenditure over the coming year.

"Prospects for consumer demand remain high," Oxford Economic Forecasting said. "In particular, we expect a continuing impact from the £36 billion sterling of windfall pay-outs households received in 1997."

"We expect consumer spending to rise by 4 per cent in 1998 after 4.5 per cent in 1997 before easing to 2.25 per cent in 1999."

But Cambridge Econometrics is more pessimistic, believing consumer spending will lose momentum because of the five interest rate rises in 1997 and as the effects of building society windfalls come to an end.

Oxford Econometrics suggests that world share prices could crash in the coming months and that a major collapse in prices world-wide, would send the British stock market down by around 25 per cent. This could slash British economic growth by a 1/4 to a 1/2 a per cent, it said.