Don't be fooled by these statistics: there is a real danger of recession ahead

Not so long ago, Gordon Brown, at the peak of his chancellorial hubris, seemed under the impression that he could single-handedly abolish the trade cycle. Now, from the vantage point of New York, he warns us that there are tough times ahead. This is indeed a good time for the Monetary Policy Committee (MPC), which meets this week to set interest rates, to take notice of what is going on – and going wrong – in the economy.

Over the weekend the Chancellor told us that the economic slowdown had spread from America to Europe and that it may not have reached its bottom. At first glance, talk of a recession would seem to be overdone. We are, after all, living through a period in which unemployment is at a 25-year low, there are shortages of skills, wage growth is strong, property prices are on a seemingly endless upwards spiral and, as figures released yesterday show, the British consumer has lost none of his or her traditional appetite for short-term debt. The retail chain Monsoon has even reported record sales of evening wear. One might be tempted to ask: "Recession? What recession?"

According to some economists, the answer to that question is "Mickey Mouse" – meaning that sometimes booms go on for so long that people forget what it is like to live through a downturn. Economies, towards the end of such phases, grow on the back of borrowed money and borrowed time and a surfeit of confidence, or "irrational exuberance", in the famous words of Alan Greenspan, the chairman of the US Federal Reserve. Walt's cartoon mouse, who is running along the ground and comes to a cliff, goes on running in mid-air for a while, looks down and suddenly realises there is no ground underneath. Then he falls like a stone.

Indeed "falling off a cliff" is the phrase used most often by companies to describe the sudden drying up of orders and investment over the past few weeks. No wonder there have been so many corporate profits warnings and poor results recently, led by technology, media and telecoms firms from Nortel and Dell to Cable & Wireless and Pearson. The recession in these sectors is already here. Now they know how manufacturing has felt for the past four years. And at the end of last week came the hardest statistical evidence we have seen thus far; a preliminary estimate suggesting that the British economy grew by just 0.3 per cent in the second quarter of this year, a little too close to negative territory for comfort.

Nor is the international outlook encouraging. America is clearly close to standstill. The potentially radical government of Mr Koizumi won the elections in Japan over the weekend but failed to lift the Nikkei. Germany continues to disappoint. When the first-, second- and third-biggest economies in the world are in such manifest trouble, the fourth, the UK, cannot afford to feel too smug.

So the case for a modest reduction in interest rates by the MPC rests not so much on what is going on in the British high street and property market today, a bubble which it is too late to do very much about, but where the economy will be in 12 to 18 months, because it takes that long for a change in rates to feed through fully.

The committee will be mindful of Mr Brown's contribution to warding off recession, the large increases in public spending on health, education and transport over the next few years, and may conclude that such moves will be stimulus enough. That, however, would be to ignore the Japanese lesson – the way that confidence can evaporate during a recession with astonishing speed and the prolonged deflationary nightmare that that can induce. A quarter point reduction in rates now would make falling off the economic cliff just a little less likely.