It will be a bleak January before, technically, we have official verification of the new recession, when the GDP numbers for October to December confirm a second consecutive quarter of falling national income. Yet that can be seen as a fait accompli, with a further steep decline now an inevitability after the sharper than expected 0.5 per cent drop of the past three months.

The scale of that 0.5 per cent plunge in GDP, which came after the economy stagnated, with zero growth, in the second quarter, has magnified fears over the danger that the new recession will be at least as deep and protracted as that endured in the early Nineties, perhaps worse.

True, last week's news was far from as bad as the severe slump that heralded the last recession. Then, GDP abruptly collapsed by 1.2 per cent in the third quarter of 1990, having risen by 0.5 per cent in the second quarter, and by 0.8 per cent in the first. Yet, the looming threat of a painful economic slump was spattered in red ink across Friday's data.

It remains possible that Britain will be able to escape the new recession becoming as vicious as that of the early Nineties. But last week's figures were bad enough to suggest that this will require both a large dose of luck, and some swift and well-judged action by the authorities. Indeed, the very real danger is that the economy could plunge on a scale similar to, or worse than, the still more brutal early Eighties recession.

Especially ominous were the dire straits of the services sector, accounting for three quarters of the economy, laid bare by Friday's figures. Services as a whole shrank by 0.4 per cent, its fastest pace of decline for 18 years, led by a 1.7per cent collapse in the consumer-dependent retail, wholesale, hotels and restaurants sector.

It seems very probable that the economy will now slide into a steep, consumer-driven downturn. With little to induce fretful consumers to stop their retreat from shops, incomes having endured a severe squeeze from soaring living costs offset by only modest pay rises, and credit remaining scarce and costly, a consumer bust to follow the consumer boom that, in reality, ended some time back, seems a certainty.

The National Institute of Economic and Social Research expects consumer spending will plummet by 3.4 per cent next year and that Britain is set to suffer the worst recession of any leading economy.

For Gordon Brown, savouring the revived poll ratings that have accompanied deserved plaudits for Britain's role in leading this month's rescues of the world's banks, this is a moment of substantial danger. As the economy wilts, the Prime Minister's revitalised standing will shrivel like autumn leaves. A catastrophic implosion of the global banking system may have been averted, along with the worldwide Depression that it would have triggered, but that will not prevent voters from blaming Mr Brown for the more modest economic calamity of a nasty recession.

The Conservatives' mockery of the Prime Minister's hubris in claiming to have banished “boom and bust” is understandable, and will no doubt score the Tories points. It is certainly true that the overhauled system of financial regulation put in place by Mr Brown in 1997 has been tested to near destruction and found badly wanting by the present crisis. It is true, too, that the Treasury and Bank of England might well have done more to rein in the headlong housing boom and the personal debt explosion that will now play their part in amplifying the bust we are about to suffer.

Yet the Tories might caution themselves that the Government's culpability for the new recession is relatively modest compared with their own responsibility for the previous one, which was the direct consequence of grave misjudgments by ministers.

Indeed, as Geoffrey Dicks, of RBS, points out in a new analysis, comparisons with the early Nineties recession are telling, offering some grounds for optimism, as well as gloom, as we ask whether things will be worse this time around.

As Mr Dicks sets out, the grounds for optimism are that, in many ways, Britain entered the last recession in a much worse state than now, thanks to a series of home-grown errors. In the late Eighties, the economy was allowed to embark on the runaway “Lawson Boom” in which consumer spending was, at one point, rising at an annual pace of 8 per cent. Inflation soared from 3 per cent in 1988 to more than 8 per cent, requiring interest rates to be doubled in 18 months to 15 per cent. The bust was then compounded by the catastrophic decision to join the European exchange-rate mechanism (ERM) at a hugely overvalued rate for the pound. This not only throttled manufacturing but conspired to keep interest rates at deadening levels even when recession took hold.

While there is much to be fearful about now, this time around matters are very different. Crucially, the inflation problem we have had is less potent, and rather than being home-grown emanates mainly from the past surge in world oil and food prices, which are now in sharp retreat. Nor does the Bank of England have its hands tied as it did in the early Nineties — it is free to cut interest rates sharply and has begun to do so.

There are, however, other vital threats to the outlook that were not present in the early Nineties. Critically, as Mr Dicks notes, the housing market is in a much more parlous state. House prices have plunged as much in the past 12months as they did in the whole of the last recession and mortgage approvals are also now down by more than in that episode thanks to the continued credit drought. At the same time, households have suffered a far more extreme squeeze on disposable income in the past three years, with almost no increase after tax and inflation. Amounts being saved have collapsed to about zero as a result — raising the acute risk that falls in consumer spending could be very sharp as recession leads Britons to rebuild their savings for the future.

These perils to economic prospects are heightened by the risk that, even if the Bank cuts official base rates, the beneficial effect will be dulled as financially strained banks continue to restrict lending and charge more for it, while consumers and companies remain reluctant to borrow.

All of this leads to the conclusion that decisive and aggressive action by the Bank is now both possible and essential, if severe recession is to be avoided. Fortunately, it also seems probable. If radical cuts in interest rates are now rapidly delivered, these, coupled with steep falls in the pound, and decisive fiscal measures from the Chancellor, can still save the economy from a disastrous slump.

gary.duncan@thetimes.co.uk

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