Leading Article: Don't panic, we're not going into recession - yet

THE STOCK market's response to yesterday's half-point cut in the interest rate was a classic example of modern market psychology. First it shot up, on the good news of cheaper money and a lower pound. A few moments later it dropped, as traders began to worry that if the Monetary Policy Committee of the Bank of England thought things were bad enough to warrant a big cut, instead of a little cut, then things must be really bad.

The rest of us should keep a sense of perspective about the moment-by- moment panics that rule the City of London. Yesterday's clatter of statistics suggest that the economy is weakening, and yet still chugging along at a reasonable pace. Manufacturing output is falling, several prominent retailers have announced falls in profits, and the outlook for jobs is mixed, to say the least. But the outlook is not yet gloomy enough to justify talk of crisis.

Marks & Spencer's lower profits, for example, are partly attributable to the company's decision to stock clothes that people do not want to wear. And, although October car sales were down a touch, they were still running only just below last year's record levels.

For the innumerate majority, most of the informal indicators are holding up well. Empty London taxis are hard to find in the rush hour. The nation's restaurants are still full. Heathrow is humming.

The decision to cut interest rates - a month or three late - was a welcome recognition that the weight of evidence has shifted in favour of the need to protect the economy from recession, and away from the need to worry about inflation. And the advantage of interest-rate changes is that they are flexible and responsive, and will have a more immediate effect than any decisions the Chancellor could make about taxes and public spending, which would take years to work through.

But yesterday's cut does not mean that the Monetary Policy Committee thinks we are actually entering a recession. It does not have any information about the likely course of the economy over the next few years that is not available to the rest of us. What is evident from yesterday's decision, however, is that the MPC - like the rest of us - does not believe the Chancellor of the Exchequer's forecasts for the year after next and the year after that.

Fresh from admitting defeat over the Government's promise to end the business cycle, Gordon Brown is now projecting a one-year slowdown followed by an immediate bounce back, a pattern that has not often been observed in British economic history.

Realistically, the chances are that growth will remain weak for some time, so, although there is no need to talk ourselves into recession, it may not be long before interest rates have to come down again.