The gloomy predictions in the Chancellor's speech to the International Monetary Fund in Washington were seen as his strongest signal so far to the Bank of England's monetary committee to cut interest rates by half a percentage point from 7.5 to 7 per cent. The committee begins its monthly meeting today. "Slower world growth makes it inevitable that growth in Britain next year will be more moderate," he said.
"But as a result of the tough and decisive action this Government has taken, Britain is better placed to steer a course of stability in an uncertain and unstable world as we get the British economy back on track for sustained growth."
The worsening world economic turmoil has prompted independent experts to call for an immediate and significant reduction in UK interest rates. The monetary policy committee will announce its interest rate decision at noon tomorrow.
In his speech yesterday the Chancellor said: "With Japan and one quarter of the world in recession, every country will be affected by the instability that is currently affecting the world economy. With the IMF forecasting that growth in world trade will fall by two-thirds this year, Britain's export markets are set to grow much more slowly."
The Chancellor's revised forecast will send shock-waves through the Government, and could put a serious hole in Mr Brown's Budget plans to be outlined in November. It is certain to intensify the clamour from business leaders for interest rate cuts to boost the economy.
Reduced growth is likely to lower expectations of tax receipts, which in turn will limit the scope for public spending announced by the Chancellor in July in the comprehensive spending review.
If the economic outlook continues to worsen, it could force ministers to go back to the drawing board and cut some of their spending commitments for the next three years, unless Mr Brown seeks to plug the gaps by higher taxation or more borrowing.
Tony Blair gave a blunt warning to his party last week to prepare for difficult times ahead. He made clear that the Government would not be blown off course by the turndown in the economy, and stressed there would be no return to the "boom and bust" of the Tory years.
But there will be pressure from trade unions and the Labour rank and file for an easing of the economy if more firms fail and unemployment begins to rise steeply.
Treasury ministers attending Labour's conference last week privately insisted that Britain will be able to escape recession, which they regard as "too awful to contemplate".
Francis Maude, the shadow Chancellor, said: "The wheel is falling off the wagon. Brown is panicking. He has got to come straight back to the House of Commons with new public spending plans. This means that Britain will be facing a massive expansion of public borrowing."
Clamour for rate cut, page 20
Business outlook, page 21