Are we heading for a fall?

Retail sales crashing. Manufacturing output tumbling. House prices stalling. Debt levels rising.
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The Independent Online

Gordon Brown has used his first major speech since Labour's election victory to insist that he would not let his record as Chancellor be wrecked by the global economic turmoil swirling around Britain. Last night he pledged to keep public spending under control, block excessive public-sector pay demands and push through reform of state services.

Gordon Brown has used his first major speech since Labour's election victory to insist that he would not let his record as Chancellor be wrecked by the global economic turmoil swirling around Britain. Last night he pledged to keep public spending under control, block excessive public-sector pay demands and push through reform of state services.

But his comments came amid mounting concern that after eight years of stability under Labour, the UK faces the prospect of a sharp economic slowdown.

Within days of Labour's election celebrations, the economy has started to look very sick. Last week saw a rash of shockingly bad figures pointing to a slump in retail sales and manufacturing output and stagnation in the housing market. Several high-street names warned that sales had fallen and profits would be hit. The Bank of England admitted it had been "surprised" by the speed of the high-street slowdown. Labour campaigned on its record of strong, stable growth and low inflation, but economists in the City are queuing up to cut their growth forecasts for this year. Eager to reassure a worried audience, Mr Brown told business leaders at a CBI dinner: "In these challenging times of high oil prices, current account imbalances and a slower rate of growth in [Europe], we will steer the economy on a stable course. Wage discipline will at all times be demanded in the public sector.

"There will be no relaxation of public sector reform. Throughout, stability is our watchword ­ stability first and foremost, stability yesterday, today and tomorrow."

The Government's economic record was a key part of the election campaign that was immune to the attacks on Labour over issues such as Iraq. It was also seen as Gordon Brown's credentials for taking over as Labour leader when Tony Blair finally steps down as Prime Minister.

As one economist, David Smith of the stockbroker Williams de Broë, put it: "One issue that was not addressed in the election campaign was why a Labour government with a massive majority needed to go to the country a year before its parliamentary term has run its course. One possible explanation is that Labour's alleged economic achievements represented the construction of a Potemkin economy and that this wobbly structure is starting to reveal its underlying flaws."

Mr Smith is a long-standing critic of Labour's programme but his description of a Potemkin economy ­ one that seems prosperous, but is propped up by artificial means or constructs ­ garners echoes across the City.

Bodies such as the International Monetary Fund and the UK's Institute for Fiscal Studies and National Institute of Economic and Social Research have lined up to warn that tax rises of £13bn a year will be needed to keep the public finances in balance.

Now that fear has been magnified by the realisation that tax rises would come as over-indebted households cut spending to meet the burden of rising interest rates and taxes. Meanwhile, Mervyn King, who as governor of the Bank of England shares responsibility for economic stability, warned that the Bank would not hesitate to raise interest rates to fight off a surge in inflation.

There have been warnings that the economic and political stability since Labour won power in 1997 might be coming to an end. Economists at HSBC say the economy can no longer rely on the combination of strong household spending and massive government expenditure.

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