Hamish McRae: Call it the Wile E Coyote and Road Runner effect

Call it the Wile E Coyote and Road Runner effect. You know the classic Warner Brothers cartoon scene. Wile E is being chased and he runs over a cliff. For a few seconds he goes on running in mid-air; then he looks down, realises there is no ground below and only then plunges down.

It has been a bit like that on the high street. Until around the middle of last month, the great British consumer was still spending the cash. Retail sales for May were 3.5 per cent up in volume, the highest month-on-month increase for 20 years. If there was an economic squeeze in the offing, nobody had told the consumer.

Since then there seems to have been a sharp change in mood. We don't have the June figures yet but given the slump reported by John Lewis, the gloomy news from the out-of-town shopping centres and the plunge in fuel sales, it does look as though consumers may have suddenly decided to tighten their belts. The puzzle is not why this might have happened, because real incomes have been squeezed for months by rising mortgage costs, rising fuel and energy prices, and higher taxation. The puzzle is why it has happened so suddenly.

Maybe there has been some bunching of the end of mortgage deals, with a lot of people having to renegotiate. Maybe the last sudden jump in fuel prices tipped the balance. Maybe the string of gloomy news reports about house prices or of the r-word, recession, has changed behaviour. But for whatever reason, the summer and autumn will feel different from the spring. Consumption, which includes spending on travel and entertainment as well as things bought in the shops, accounts for two-thirds of economic demand. So if consumers slacken, the whole economy dips. This change in mood is being reflected in the various forecasts for economic growth. Most of these for this year are now coming in at about 1.5 per cent, below even the bottom of the 1.75-2.25 per cent range forecast in the Budget. That would be bad news for the Chancellor, since slower growth cuts tax revenues and the projected budget deficit is already above the 3 per cent of GDP ceiling set under the Maastricht rules. But the more disturbing issue is not what happens this year but what happens next. Every major forecast I have seen bar one suggests that growth next year will be the same or lower than in 2008, with the lowest, from Lehman Brothers, suggesting it will be only 0.3 per cent. The exception is the Treasury's, with a growth range of 2.25-2.75 per cent.

What is happening in the shops does not necessarily mean there will be a recession, defined as two successive quarters when the economy shrinks in size. Nor does it mean that unemployment will soar: rise somewhat yes, soar no. What it does mean is that we will have a cooler economic climate for the next 18 months, maybe longer. But we knew that already.