Not even New Labour can abolish the business cycle

The markets have notoriously short memories, so it is worth pointing out that we have been here - or hereabouts - only two-and-a-half years ago. In the autumn of 1998, stock markets around the world fell after the East Asian meltdown and the Russian debt crisis prompted fears of a global recession.

The markets have notoriously short memories, so it is worth pointing out that we have been here - or hereabouts - only two-and-a-half years ago. In the autumn of 1998, stock markets around the world fell after the East Asian meltdown and the Russian debt crisis prompted fears of a global recession.

Then, the US Federal Reserve cut interest rates and baled out a big investment fund, and confidence was turned round. This time, however, the therapy is not working.

It is too early to say whether this fall in the markets will soon follow the 1998 pattern or whether we are in for something more serious. But it is worth observing that neither the "internet effect" optimists in America nor the prudent management of Iron Brown in Britain could ever succeed in abolishing the business cycle - despite the vain boasts of New Labour that there will be "no return to boom and bust".

There is bound to be some kind of economic slowdown in America and in Europe, probably linked, at some time. The long, steady-ish boom of the Clinton and Major-Blair years simply could not go on. The only questions are: when and how bad will the negative phase be? In 1998, the world economy simply paused for breath. As our economics editor wrote yesterday, that was a healthy development because it cooled down a boom that might otherwise have accelerated unsustainably.

This time, the talk is of recession - negative growth for two quarters - in America, with all the consequences that will have here. That is certainly possible, whatever the tendency of the financial markets to over-shoot, not least because of the effect on confidence of a big collapse in share prices.

One of the differences between Britain and America is that far fewer people directly own shares in this country, so that the knock-on effects on consumer confidence of a stock-market fall is more muted. But this week's drop has been so dramatic that even people who do not normally read the business pages now know that TMT stocks are shares in technology, media and telecommunications companies. And they know that the malaise has spread beyond this "new economy" to the old economy.

The case for further interest-rate cuts is now strong on both sides of the Atlantic. The European Central Bank decides next week, while the Bank of England decides on 5 April, the last day on which a 3 May election could, theoretically, be called. It is to be hoped that election hype about the state of the British economy will not cloud the necessary process of adjustment to the sober reality that hard times are ahead.