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Leading Article: The boom is over. The only question now is how hard the landing will be

Any hopes that economic policymakers and central bankers might have harboured of the new year bringing good news for the world economy have been well and truly dashed. The situation is looking more ominous than at any time since the present crisis of confidence in Western economic markets began.

The credit crunch shows no signs of abating. Large US banks have been writing down billions in bad debts since the financial markets locked up last summer. And one of the largest, Merrill Lynch, this week announced that it made an outright loss, to the tune of £3.9bn, in 2007. Merrill has managed to survive liquidation only by going cap in hand to the sovereign wealth funds of Asia and the Middle East. Citigroup, UBS and Morgan Stanley have been forced to perform the same humiliating pilgrimage.

After initially being vague about the extent of their losses on dodgy US mortgages, the banks have adopted a "kitchen sink policy" of getting all the bad news out as rapidly as possible. But that has failed to calm the markets. The fear is that there is worse still to come.

Meanwhile, in Britain, the rush by investors to withdraw money from a Scottish Equitable commercial property fund shows confidence on this side of the Atlantic is similarly lacking. And, of course, the Northern Rock crisis remains perilously unresolved. Yet the problems go much further than high finance. The US housing market is falling steeply. Consumer spending has slowed. Economic data last week showed the jobless rate rising to 5 per cent.

The situation is even more worrying in Britain in some ways. The big retailers have reported their worst Christmas performance in more than a decade. Shoppers are tightening their belts. British manufacturing output fell in November. Employment is under pressure too. The Chartered Institute of Personnel and Development has forecast a slowing of the job market in 2008. Meanwhile, house prices are also heading south. The Bank of England expects the number of households defaulting on their mortgage payments to rise over the next three months.

All of this would be deeply worrying under any circumstances. But making matters still worse is that the traditional methods of boosting the economy and easing the flow of money are unusually risky at the moment. The US Federal Reserve has cut interest rates three times since the crisis began and the Bank of England followed last month. But how low can, or rather should, the central banks go? Inflation is creeping up in the US and Britain. The price of oil has breached $100 a barrel and global food prices are rising. The cost of clothing and medication is going up in the US. And here in the UK, British Gas yesterday became the latest energy firm to announce inflation-busting prices. It is true that the falling values of sterling and the dollar should help our exporters, but it could also exacerbate inflation. If policymakers are not careful, they could end up creating a situation where we have weak, or even negative growth, at the same time as rising prices.

Events and forces are coming together in a very troubling way. The old assumption that strong growth from India and China would be enough to pull us through the crisis looks increasingly shaky. The financial rescue package George Bush announced yesterday for the US economy looks more like a sign of desperation than confidence. The response of our own Government and the Bank of England has beensimilarly hesitant.

We have enjoyed a boom and now it looks increasingly as if the bust will soon be upon us. Many reputations and careers will depend on whether a soft landing can be engineered or not.