Top forecasters have suggested that the outlook for the UK economy next year is bleak as business confidence is fading due to recent results.

Ernst & Young Item Club has predicted that growth in 2009 will be just 1%, as living costs rise and falling house prices have a negative effect on consumer spending. They went on to say that employers confidence had fallen to its lowest level since 1996.

A minimal growth of disposable income combined with a sharp rise in food and fuel costs, means that spending on non-essential items will be cut.

The US government announced that it plans new measures to bolster the two largest US mortgage companies, Freddie Mac and Fannie Mae. The new measures will call on the US Congress to increase the firm’s access to credit, and permit the Treasury to purchase shares in the companies when needed.

The Federal Reserve has also stated that it would lend to Freddie Mac and Fannie Mae if additional funds were required.

The Forex market is bracing itself for what could be an unpredictable week, as an influx of key economic releases and US Independence Day holiday is expected to add to the volatility of the market. US dollar traders will be eagerly awaiting the release of ISM Manufacturing and NON-Farm payroll data, while euro investors will see the Euro-zone inflation and German labour data. It is also expected that the European Central Bank will raise rates for the first time since last June.

The Federal Reserve has announced that US interest rates are to be held at 2%, amidst continuing worries in the housing market and consumer confidence allegedly at its lowest level in 16 years.

The move was an expected one, with analysts stating that the Federal Reserve is facing a balancing act, as it copes with rising prices and economy slowdown. A recent survey has suggested that house prices were significantly lower in April, compared to the same time last year.

The pound fell against other currencies as UK Consumer Price Index (CPI) rose by more than expected in May, reinforcing the views of Mervyn King the governor of the Bank of England who warned that rising food and energy costs could push UK inflation higher than 4% by the end of the year.

UK CPI was up to 3.3% in May, compared to just 3% in April, this was mainly due to the rising cost of meat products and vegetables. An increase in energy bills was also an important factor, as well as rising book, stationery and foreign holiday costs.

The Asian Development Bank (ADB) has stated that the threat of high inflation could undo the progress of the past 20 years, and remains a major worry for the Asian market.

Rajat M Nag, managing director of the ADB said that inflation would exceed the 5.1% that was predicted in April. Rising food and fuel prices are the main dangers that are affecting the Asian inflation rates.

Rising inflation could damage investment and corporate earnings, which in turn could destabilise governments in the region.

Corn prices have risen to new highs as the US Department of Agriculture predicts that supplies will fall because of poor weather.

Corn hit the record price of $6.672 a bushel this week on the Chicago Board of Trade after the forecast, as crops have been hit hard by flooding and wet weather in the US.

Also adding to the problem, demand for corn for use in both food and fuel has been steadily increasing worldwide, and as demand for corn to feed animals and make biofuels increases it is likely to push up prices further.

The dollar continued to progress against the yen in Monday afternoon’s trading in Tokyo; this was mainly due to Japanese importers buying the greenback following its earlier decline.

Japanese investors purchase the dollar when the currency falls, as they try to finance purchases of basic raw materials and oil at lower prices.

The dollars short-term outlook remains unclear after the latest US jobs data revealed a sharp increase in unemployment in May.

The U.S. dollar traded a little higher against the major currencies in Monday trading in Tokyo, held up by positive demand from investors seeking higher yielding assets.

Overall trading was cautious with investors waiting for a flurry of U.S. economic data due out later this week, as well as announcements from the Federal Reserve and European Central Bank. The financial market will be looking for any inklings on where interest rates are headed when the Federal Reserve and the European Bank make their speeches on Tuesday.

Nationwide Building Society has announced that UK house prices have had there largest monthly fall since 1991 and according to the report prices have fallen by 2.5% during May.

The lender also said that prices were now 4.4% lower than this time last year, which equates to a drop of nearly £8,000 that has taken the average house price down to £173,583.