Prime Minister David Cameron will warn today that the crisis in the Eurozone is having a "chilling effect" on the UK economy, even as he sets out plans to spend £400m to kick-start growth.
The government’s growth drive, which will focus on funding new housing, is likely to be one of many announced in coming weeks to breathe life into the economy as it fights to avoid recession caused by weakening activity in the sovereign debt-hit Eurozone.
"Paralysis in the Eurozone is causing alarm in the markets and having a chilling effect on economies in many countries - including our own," Cameron said in advance excerpts of a speech to business lobby group the Confederation of British Industry.
"When the nightly news is about rising interest rates in Europe and uncertainty about the future, it is not surprising that that affects business and consumer confidence," he added.
"I am absolutely clear about the right answer for the UK economy. It can be summed up in one sentence. We need to deal with our debts and go for growth."
GDP growth in the UK has stuck stubbornly below 0.5 per cent in each quarter this year, and stagnated for six months until the second quarter.
Economists warn that slowing output at factories and falling retail sales show the economy is at risk of contracting in the final quarter of this year.
The coalition has made cutting a budget deficit that peaked at 11 per cent of national output its priority and has limited money available for investment projects.
It has earmarked funds for housebuilding, which has slumped to the lowest peacetime level since the 1920s. The average age of first-time buyers has climbed as many young people are priced out of the market.
"The housing market is one of the biggest victims of the credit crunch: lenders won't lend, so builders can't build and buyers can't buy," Cameron and his deputy Nick Clegg wrote in the foreword to a new housing strategy document for England.
It wants developers to compete for funds and plans to favour "shovel ready" projects, with the aim of starting building by July 2012. The fund could see the construction of up to 16,000 homes and support up to 32,000 jobs, it said.