Chancellor Alistair Darling has cut his growth forecast for next year but offered hopes that the impact of the global credit crunch might be short-lived.
Mr Darling lowered GDP growth predictions for 2008 to between 2% and 2.5% – compared to the 2.5% to 3% predicted by former chancellor Gordon Brown during his last Budget in March.
But the Chancellor added that the economy remains on track for 3% growth this year and he maintained forecasts of between 2.5% and 3% for both 2009 and 2010.
His widely-expected move to cut 2008 growth predictions follows the summer’s financial turmoil when banks, fearful of exposure to losses on high-risk US mortgages, stopped lending to each other, leading to the run on mortgage lender Northern Rock.
The documents acknowledge the fact – pointed out by Alan Greenspan, the former US Federal Reserve chairman, to this newspaper last month – that Britain is almost uniquely vulnerable to the financial crisis.
The problem is twofold: Britain is heavily reliant on the City for its growth, but financial services are now in trouble.
Meanwhile, UK households are more heavily indebted than almost any of their overseas counterparts, and their interest rates are starting to rise.
The economic powder keg underneath Britain’s foundations is of an alarming scale. Household indebtedness is double what it was a decade ago.
The cost of living has risen at its fastest rate for at least 10 years, forcing the Governor of the Bank of England to write a letter of explanation to the Chancellor for the first time.
The Consumer Prices Index (CPI), the official measure of inflation, rose to 3.1% last month, more than 1% above the Government’s target for inflation.
Governor Mervyn King has to write an open letter to Gordon Brown if CPI hits more than 1% above or below the 2% target.