The British government slashed its growth outlook on Tuesday, blaming the impact of the eurozone debt crisis, and unveiled a £30-billion infrastructure scheme to help kickstart the economy.
Finance minister George Osborne, delivering his autumn statement to parliament, insisted however that there would be no let-up in the coalition's plans to axe the deficit and steer clear of the global debt storm.
Markets took the news in their stride as the contents of the statement had been widely trailed in the media.
The economy would grow by just 0.7 percent next year, about a quarter of the previous official forecast of 2.5 percent, given in March, as Britain struggles to shield itself from the eurozone crisis.
Gross domestic product (GDP) was predicted to expand by 0.9 percent this year, about half the prior guidance for 1.7-percent growth.
Chancellor of the Exchequer Osborne was citing figures provided by the Office for Budget Responsibility (OBR), an independent fiscal watchdog set up by the government last year.
The OBR also raised its state borrowing forecasts for the next five years, putting a dent in the Conservative-Liberal Democrat government's hopes of virtually eliminating the deficit by 2015.
"Much of Europe now appears to be heading into a recession caused by a chronic lack of confidence in the ability of countries to deal with their debts," Osborne told lawmakers.
"We will do whatever it takes to protect Britain from this debt storm while doing all we can to build the foundations of future growth.
"Today, we set out how we will do that by demonstrating that this country has the will to live within its means and keep interest rates low," he added.
The OBR stopped short of predicting a double-dip recession in Britain -- but Osborne refused to rule out a fresh downturn.
"If the rest of Europe heads into recession it may be hard to avoid one here in UK," he warned.
On Monday, the OECD warned that Britain was indeed heading for a fresh downturn after exiting recession only in late 2009.
Although not a member of the eurozone, Britain is a key trading partner of the neighbouring bloc.
The Fitch ratings agency warned that Britain's top triple-AAA debt rating was on the line if any further shocks hit the country.
"The capacity of UK public finances to absorb adverse economic and financial shocks that would result in yet higher public debt while retaining its 'AAA' status has largely been exhausted," Fitch said in a statement, but did not change Britain's ratings outlook from stable.
On Wednesday, up to two million public sector workers in Britain will strike in protest over pension reforms, and against a backdrop of rising unemployment after massive cuts to state jobs under a government austerity drive.
The OBR on Tuesday predicted that the public sector would shed about 710,000 jobs between 2011 and 2016 -- far higher than the previous forecast of 400,000.
And the unemployment rate was forecast to hit 8.1 percent this year and 8.7 percent in 2012, before falling back to 6.2 percent in 2016.
In a bid to boost the economy, Osborne also unveiled plans to boost infrastructure expenditure by £30 billion (35 billion euros, $47 billion).
"For the first time we are identifying over 500 infrastructure projects we want to see built over the next decade and beyond," Osborne said.
"Roads, railways, airport capacity, power stations, waste facilities, broadband networks (will be built), and we're mobilising the finance needed to deliver them too," he added.
Osborne said the so-called National Infrastructure Plan would be "revenue-neutral," neither adding to borrowing nor producing extra savings.
The Treasury will help to fund the projects with £20 billion of private investment from pension funds.
The chancellor will also launch a "national loan guarantee scheme" to encourage lower interest rates on loans to small businesses, with the aim of unclogging the flow of credit and boosting economic activity.
Initially, £20 billion would be available over the next two years for the scheme.
The Chancellor's statement was welcomed by the Confederation of British Industry, which is the country's biggest employers' organisation.
"This autumn statement ... provides an imaginative framework for UK businesses as it strives to secure growth and jobs," said CBI Director-General John Cridland.
"The downgraded forecasts and outlook were no surprise, but the eurozone crisis is still hanging over us."
The coalition has sought to axe spending and raise taxes, after ousting the previous Labour administration last year and inheriting a record deficit.
Labour finance spokesman Ed Balls criticised the government for cutting spending too fast and risking the recovery.
"Cutting too far and too fast has backfired ... If you try and cut spending and raise taxes too far and too fast you risk choking off recovery," Balls said Tuesday.