An uncertain New Year for our economy

This New Year has dawned with some dire warnings about the prospects for our economy. Yesterday, Woolworths revealed that its sales have been flat over the Christmas shopping period, prompting fears that other major retailers have also done badly. More seriously, several economists are predicting a sharp downturn in the housing market in 2005, which would have the effect of making many of us feel a lot poorer.

Nor is the global outlook encouraging. There are no signs that the world economy is about to emerge from its period of sluggish growth. Britain has insulated itself well from the slowdown in recent years through a combination of low interest rates, which have encouraged people to keep their wallets open, and the Government's lavish public spending. But this cannot go on. Both the private and public sectors will have to rein in their spending this year, if the economy is not to become even more unbalanced by debt. The question is whether this will be done slowly or quickly. If it is done slowly, the economy will have a gentle landing. If done quickly, we may be plunged into recession.

Ideally, the British public will continue spending, but at a slower rate. In this context, the indication that there may be further disappointing retail results to come may not be such a bad thing. The rate at which we spend is primarily influenced by interest rates and the value of our homes. Interest rates have been gradually rising and house prices are stalling, so at least the conditions for a managed slowdown are in place.

Government spending is a tricky area. Gordon Brown will be loath to turn off the spending taps in an election year. But if he is to meet his "golden rule", he must take urgent action to bring down the public sector deficit.

Britain is leaving a period of unprecedented growth, and we need to cut our cloth accordingly. But if we make the right decisions, the transition need not be too painful. And the catastrophe in the Indian Ocean - which took place when most of us were enjoying our annual festive orgy of consumerism - ought to serve as a reminder of just how fortunate we are to be discussing such marginal adjustments to our prosperity.