After the global sigh of relief that financial Armageddon has been avoided, markets were reminded yesterday of the awful truth. The real economy is going down the pan.

In Britain, unemployment rose at the fastest pace since 1991, with the jobless total increasing by 164,000 to 1.79 million in the three months to August.

And the figures do not take in the period since the financial crisis went nuclear. Unemployment could rise to two million by Christmas and continue increasing through next year. Capital Economics, admittedly at the gloomiest end of the spectrum, suggests that the figure could reach three million by the end of 2010. There was more dismal economic news from the US. Retail sales were down but wholesale costs are still rising, putting company margins under pressure.

But what really knocked the stuffing out of London share prices yesterday was the warning from Rio Tinto that slowing demand in China had forced the mining giant to cut back its expansion plans.

The news knocked Rio’s shares down by 17 per cent while its rival BHP Billiton, from which it is facing a hostile bid, was down 15 per cent. The miners are such a big component of the FTSE 100 these days that the index closed down more than 7 per cent.

No one with an ear to the ground will have been surprised at Rio’s bearish statement. Chinese steel mills have been struggling with a vicious price squeeze for months. They are paying top dollar for iron ore, much of it shipped by Rio and BHP, but at the same time the price of steel is falling fast.

Meanwhile, the price of coking coal, another import, is still high, and wage rates in China are no longer ridiculously cheap. All in all, it is a moot point whether China is competitive at all in this market for low added-value building materials.

The wider concern is that China might retreat from global export markets without a corresponding compensating surge in domestic demand. Inflation is rampant in the People’s Republic, and Beijing needs to do the tricky thing of stimulating growth without setting off an inflationary binge and bust. Meanwhile, Rio looks a little unsettled and not just because its remarks ripped so much money out of the stock market. BHP Billiton is still waiting with a bid on the table and is now hoping that its heavily indebted rival might be persuaded to talk.

BHP should not be too confident, though, because if its plan to consolidate the iron ore market enraged profitable Chinese steelmakers, it can hardly expect a meek response now that these same customers are in trouble.

It is not just Chinese demand that is flagging. Emerging market shares have plunged in recent weeks amid fears that many fast-growing economies are much more vulnerable to a global economic slowdown and to the financial crisis than was previously thought.

One widely watched commodity index hit a new two-year low yesterday, after falling almost 40 per cent from its high in July. Oil dropped 5 per cent, falling below $75 a barrel for the first time in more than a year.

These falls and the moderate increases in pay we have been seeing should mean that the 5.2 per cent inflation rate last month should be the peak. That leaves the Bank of England with room to cut interest rates further after last week’s coordinated half-point cut to 4.5 per cent.

To judge by yesterday’s gloomy comments from Ben Bernanke, Chairman of the US Federal Reserve, central banks might do the same again before long.

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