A business lobby group called for "forceful" measures to kickstart the UK's recovery today after predicting the economy will grow by just 0.6% this year.
The British Chambers of Commerce (BCC) said there was an "encouraging" pick-up in growth in the past three months which means the UK will likely dodge another recession but warned the economic expansion is still "much too slow".
Its gloomy growth prediction for 2012 comes amid rising oil and food prices, which mean that inflation will fall less quickly than previously thought, while the eurozone debt crisis continues to hit confidence.
It forecasts that unemployment will rise to 2.9 million over the next year and said the Government needs to take "radical" steps to set businesses free, including creating a state-backed bank to boost lending to small and medium-sized enterprises (SMEs).
Other suggested measures include ramping up its credit easing scheme, scrapping this month's 5.6% hike in business rates, and speeding up the proposed improvements to transport infrastructure.
John Longworth, director general of the BCC, said: "The UK economy is still facing huge challenges and the recovery is much too slow.
"The UK has the potential to recover but to achieve that the Government has to set businesses free to grow.
"As the public sector's share of economic activity shrinks over the next few years, forceful measures are needed to make it possible for businesses to drive recovery."
The BCC's quarterly economic survey, which is based on 8,000 responses from businesses across the UK, showed a welcome improvement in confidence and orders.
But the powerhouse services sector in particular remains sluggish and most readings, including exports, are still below levels seen before the recession.
It predicts 0.3% growth in the first quarter of 2012, which would mean the UK avoids a recession - defined as two successive quarters of contraction - after its 0.3% fall in the final quarter of 2011.
But its prediction for growth in 2012 as a whole is weaker than the 0.8% predicted by the Government's independent forecaster the Office for Budget Responsibility at last month's Budget.
BCC chief economist David Kern said: "With domestic demand remaining weak and unemployment likely to increase to approximately 2.9 million over the next year, every effort must be made to boost growth and empower the private sector to create jobs."
He added that more must be done to make sure the Bank of England's money printing scheme encourages lending to SMEs.