Jeremy Warner: Rate cuts are UK's only weapon in fighting recession

Outlook Never mind the US, back home the economy seems to be sliding into an ever deeper recession. The services sector shrank by a record amount in October, while manufacturing continued to suffer. It is more than possible that the present contraction will be worse than that of the early 1990s, when the peak-to-trough fall in output was "only" 2.5 per cent. Most business leaders talk of a particularly sharp fall in activity over the last month, with no sign of where salvation might lie.

With the inflationary pressures that so much occupied the Bank of England just a few months back now self-evidently easing fast, employers are looking to the Monetary Policy Committee to produce another steep fall in interest rates when its monthly meeting concludes today.

So desperate has the situationbecome that anything less than 100 basis points might be viewed as adisappointment. But don't hold your breath. Such a big cut would be tantamount to admission that the Bank of England has been a long way behind the curve in recognising the seriousness of the downturn. Something more measured is therefore more likely. The Bank of England does not want to be seen to be panicking.

All the same, extreme policy action is fast becoming the order of the day. So busy have Gordon Brown and Alistair Darling been, preaching to the world about how to solve the banking crisis and reform the global financial architecture to boot, that they seem no longer to find time to lecture us on how much more resilient, thanks to the brilliance of their policy making, the UK economy is to the downturn than almost everywhere else. Or perhaps it is just because it is no longer possible to keep up the pretence.

Ever since the credit crunch began, it has been apparent that whatever the extent of the slowdown it was bound to be more serious in Britain than America and the rest of Europe. Britain had a bigger housing bubble than anywhere else, households were more leveraged, it has a much bigger financial sector relative to the overall size of its economy, and it already had a big budget deficit before the downturn began, giving the Government even less scope for fiscal stimulus than the US.

As it is, next year's budget deficit as a proportion of output is likely to be higher than that of the US, and that's before any Keynesian-style boost. For the most resilient developed economy, look not to the UK but to Canada, which enters the downturn with both a budget and current account surplus, as well as fully funded public pension liabilities.

Now there's an economy that really can afford to spend its way to salvation. Yet there are a few positives. One of the biggest is that in the UK interest rates remain relatively high, which gives lots of scope for cutting them.