The economy is certainly slowing sharply but things have to get quite a lot worse before there is a real danger of recession. That is the main lesson of the new GDP figures and the CBI's survey of retailers. However a slowing economy is bad news for the government's finances, and the Treasury is already having to borrow more than last year. And there is an even bigger issue looming: how does the Chancellor get the economy into good shape to weather the next global downturn, whenever it comes?
The Chancellor did not know that the GDP figures would show the economy had grown only 1.5 per cent in the previous 12 months when he made that upbeat speech to conference. But he did admit at the weekend that growth would be closer to 2 per cent than his pre-election growth forecast of 3-3.5 per cent. Now even 2 per cent looks implausible: it looks like being around 1.7 per cent. The economy would have to have to speed up hugely in the second half of the year and that is not going to happen. Retail sales are already pretty bad and the new CBI distributive trades survey suggests they will get worse. If consumers continue to cut back, then it is very hard for the economy to grow much - consumption is nearly 70 per cent of the total.
You can see those new GDP figures in the top graph on this page - low by the standards of the past 12 years but of course nothing like the early 1990s recession. The relationship between the CBI survey and retail sales is shown on the front page. The survey is based on what retailers expect and, as you can see, that gives a good feel for what people will actually do. So far at least, retail sales are still growing on an annual basis, but only just.
Slower growth hits the public accounts in two main ways. It means lower tax revenues and, insofar as unemployment rises, higher welfare payments. The self-evident result is higher-than-expected borrowing. That is exactly what as been happening, as the second graph on this page shows. Instead of borrowing running below last year's level, as forecast in the budget, it has been running above - every year for the past four years, the borrowing outcome has got a bit worse.
How much does all this matter?
Those of us who forecast at the time of Labour's first party conference in government that there would be a global recession by 2001 can point out that we got the world economy right. But we have to acknowledge that the UK came through it in rather better shape than we had expected.
Now the world is at pretty much the same point of the global cycle as it was in 1997. We don't know how long the present growth phase will continue - it is wobbly right now - but the chances of it lasting more than another four years must be slim.
The obvious question is whether the UK can reasonably expect to come though the next downturn in as good a nick as it came though the last one. The answer to that question may even determine the result of the next general election; it will surely determine how Gordon Brown as Chancellor is regarded by history.
We cannot know the shape or timing of that global downturn. Some economists that think we are close to it already. They cite the surge in oil prices, heavy borrowing by both governments and consumers, and the supposed overvaluation in house prices in many countries, including the US and UK. But intuitively this does not feel to me like the end of the boom: it does not have that manic quality of the late 1980s or late 1990s. So my guess is that we are seeing a pause in growth, not the end of it.
If that is right then the world will scramble on for a while yet. But eventually global growth will slow and the trick will be to be in a position to keep going when it does.
To do that means you have to be in a strong fiscal position. During the last downturn the UK was indeed in such a position, thanks partly to the underlying improvements in competitiveness under the Tory governments and thanks partly to the strong anti-cyclical policies of Gordon Brown.
Think back. He inherited a growing economy with a small budget deficit. He then pegged spending and (slightly) increased taxation. Result: growth carried on and the budget moved into surplus. So when the downturn came the UK could offset its effects by moving from surplus to deficit: we had one of the most expansionary fiscal policies in the world. Add in flexible monetary policy from the newly-independent Bank of England, and - hey presto - growth carried on.
Now we are no longer in that happy position. We ought to have a budget that was in surplus, as do several of the smaller developed countries, not one in deficit. So that trick of increasing public spending if the private sector falters is not on. We can cut interest rates of the downturn becomes deeper and I'm sure that will happen. But will it be enough?
No country is in a perfect position. Much of continental Europe is clearly struggling, while the US is at last realizing that it has huge inefficiencies and imbalances that it has to tackle.
So I don't think there is cause for alarm, or at least not as much alarm as some people in the business community feel. Nevertheless we cannot assume that we will drive through the next downturn as well we did during the last.
So where does this leave Chancellor Gordon? Well he seems to be saying that he won't have to put up taxes, or at least not by much. But the tax burden ITALS as opposed to the tax rates, is scheduled to go up sharply. By contrast, consumption, which has shot up over the past 15 years, will grow only slowly. If growth really does slow then we may not feel much richer in, say, four years' time, than we do now.
And then we might get very ratty indeed.Reuse content