Washington  - The US budget deficit will surge to nearly 3 per cent of US economic output this year, while annual growth will average less than 1 per cent until mid-2009, the Congressional Budget Office (CBO) said Tuesday.

The projected 407-billion-dollar deficit for 2008, up from 161 billion dollars in 2007, did not include the just-announced government bailout of mortgage giants Fannie Mae and Freddie Mac, which could add as much as 200 billion dollars to the federal deficit.

CBO Director Peter Orszag said the higher deficit - 2.9 per cent of the US gross domestic product - reflected both increased spending and a reduction in government revenues over the year.

Orszag also warned that a recession was still possible this year as the economy deals with an ongoing housing crisis and surging energy costs.

"The increase in unemployment rates and the weakness in economic activity continued in our projections are consistent with the pattern seen in past recessions - the past few recessions, to be precise," he said at a press conference.

The economy contracted in the last quarter of 2007 but recovered to a 3.3-per-cent annual growth rate in the second quarter of this year. The CBO report forecast growth of 0.9 per cent for 2008 and 1.9 per cent for 2009. (dpa)