Leading article: An economic forecast that upsets the political apple cart

The Governor of the Bank of England did not come yesterday to bury the economy's "green shoots". But Mervyn King was, nevertheless, at pains to point out how fragile they are. He was right to do so.

The financial markets are getting ahead of themselves. What signs of improvement there have been in recent months have, in the main, been the consequence of the vast sums that have been injected into the economy by the Government and the Bank of England. This is no private-sector led recovery. As such, it is inherently unstable.

The stock market might be going up, but many other economic indicators from the real economy are heading in the opposite direction. Employment levels, for instance, are still falling. And as Mr King pointed out yesterday, unemployment could yet pick up pace as companies that have been holding on to staff in the hope of a robust recovery, decide that they can no longer afford to do so. The Governor also stressed yesterday that the recovery, such as it is, will be weighed down for the foreseeable future by the continued weakness of the banking sector and the pressing need for households and businesses to pay down debt.

Politically, this prognosis is bad news for Gordon Brown. The Prime Minister had been praying for a robust recovery by next spring when he must call a general election. The Chancellor, Alistair Darling, had even budgeted for a return to reasonably healthy growth by the end of this year. Mr King's words yesterday rained on that particular parade.

But the Governor's sobering overview is not necessarily such wonderful news for the Conservatives either. One of the implications of his analysis is that that the measures taken by the Government to stimulate demand in the economy in the past year - some of which the Tories opposed - were necessary. The Bank's latest report could also serve to shift the focus of the political debate to an area in which the Conservatives are uncomfortable. The Tories have been making a great deal of noise of late about the level of government borrowing, using the projected figures to castigate Mr Brown for losing control of the public finances. But David Cameron and George Osborne have said very little about what they would do about the problem of sickly demand. If unemployment continues to rise and economic growth remains anaemic they will have to come up with some answers to this.

The truth is that both parties, to some extent, are guilty of misdiagnosing what has taken place in the global economy since the near death experience of the global financial system last autumn. Both seem to believe that there is not a great deal that is fundamentally wrong with the British economy.

The FSA's mild proposals for regulating City remuneration unveiled yesterday reflect this official view that only minor tinkering with the financial system is required. Meanwhile, the Tories' fixation on abolishing the FSA and transferring its powers to the Bank of England suggests an unwillingness to confront the far more significant structural problems of our economy, such as our reliance on credit and the weakness of our manufacturing sector.

The economic world has been changed profoundly by the banking implosion and the depth of the subsequent slump, but our political leaders here in Britain, worryingly, still do not appear to have fully woken up to the new reality.