LEADING ARTICLE:Passing cloud over the economy

The high street is singing the blues, the housing market is down in the dumps. Factories are producing no more than they were six months ago. The fall in unemployment has slowed to a trickle. Exports, the one bright spot in the picture, are flagging, with their prospects clouded by the marked slowdown in the world economy. The much-touted recovery seems to be spluttering out before most people realised it had even begun.

Time to push the panic button? Not necessarily so. There are two scenarios of what lies ahead. One is that the recovery is in danger. The other is that we are witnessing a pause in growth. Of the two, the second seems both more likely and arguably something to be welcomed, given Britain's chequered past of boom and bust.

The case for the pessimists is that the 1990s are different from the 1980s both in degree and in kind. The surprise drop in consumer spending and rise in the savings ratio in the first quarter of 1995 are no accident. The overhang of debt built up in the excesses of borrowing in the go-go years means that it is idle to hope that consumers will return to their free-and-easy spending ways. Caution is the watchword, with a manifest reluctance to dip into savings to finance consumption.

The clearest evidence of this is the continuing trauma of the housing market. That has knock-on effects on the whole of the economy, since it has effectively demobilised the tried-and-tested engine of economic expansion in the past. Retailers had better get used to hard times.

Consumers are certainly not going to return to the spendthrift days of the 1980s: on that score the pessimists are right. But the notion that they are going to withdraw into their shells for long seems implausible. They didn't in 1994, when taxes rose sharply. True, this is the first year in which all the increases in taxation are in place. But with earnings growth likely to pick up, consumers will henceforth have more money in their pockets - not least because of the windfall gains from building society takeovers.

So the recovery is likely to be sustained, if not at the heady rate of 4 per cent notched up in 1994. Even if world trade falters, exports are currently so profitable that they, too, should pick up momentum again. Vigilance is clearly called for in case an economic slowdown turns into something more serious. Yet for now, the pause for growth scenario is the more plausible. The economy is changing down a gear from what was probably an unsustainable growth rate.

This must seem highly unsatisfactory to the millions unemployed. However, given Britain's wretched record of boom and bust, it must be preferable to breakneck growth that is then followed by a crash.

But the position would be much more favourable if there was evidence that investment was picking up in a big way. Instead, it is falling at the very moment it should be increasing sharply.

Low investment has been the perennial bane of the British economy. What is clear is that the economic remedy for the political feelbad factor is not the right one to rectify the problem. Tax cuts may go down well with backbenchers, but interest rate cuts would be preferable for industry.

That won't cut much ice with a government that is clearly intent on playing its last card to the voters. But then the electoral cycle is what delivered us boom and bust in the first place.