Britain will avoid a double-dip recession but growth will remain muted throughout the year, according to the British Chambers of Commerce (BCC).
Its quarterly economic survey forecast growth of 0.3% for the first three months of 2012, meaning the UK would avoid the two consecutive economic contractions which would technically mean recession has returned.
But with weak domestic demand and unemployment set to increase steadily to nearly three million talk of a quick recovery remains unrealistic, it argued.
The BCC said 2012 growth would be 0.6%, less than the 0.8% forecast by the Office for Budget Responsibility in last month's Budget.
Unresolved eurozone problems and a slower-than-expected fall in inflation, caused by high oil and food prices, were to blame for the downgrade.
"While the government perseveres with efforts to cut the deficit, it must reallocate priorities, within the spending envelope, towards growth enhancing policies," chief economist David Kern said.
"Red tape must be cut more aggressively, the credit easing programme must be made more effective, and the monetary policy committee must do more to ensure that the huge quantitative easing programme encourages increased lending to viable SMEs."
The BCC wants ministers to bring forward medium- and long-term measures to boost infrastructure and introduce deregulation.
It is also concerned about access to finance and is demanding that "more radical measures" like a state-backed SME lender should be considered.
Director-general John Longworth said: "We support the need for the government to persevere with its deficit-cutting plan, but there must be a significant reallocation of spending priorities.
"There must be a greater focus on policies to support growth that will enable businesses to create jobs, invest, and export. 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."