The spectacle of thousands of fearful Northern Rock customers laying siege to the embattled lender’s branches across the country - the sort of scenes not witnessed in Britain for decades – seems certain to deal a blow to the country’s confidence in wider economic prospects.

Even if, as seems likely, the government guarantees given yesterday succeed in ending the run on Britain’s fifth-biggest mortgage lender, the Chancellor and Labour strategists will be anxious over the damage to sentiment over the soundness of the economy – the continued strength of which remains a central plank of the Government’s political strategy.

The blow from the Northern Rock debacle comes at a time when economic confidence is already being sapped by the the Bank of England’s five interest-rate increases since August last year, the full effect of which is only now starting to be felt in many people’s pockets.

Consumers, laden with £1.35 trillion of debt, are feeling the pinch as higher repayment costs and dearer mortgages for those who are seeing the end of cheap fixed-rate loans add to the burden of last year’s steep increases in utility bills.

BACKGROUND

• Goldman Sachs steps into Northern Rock crisis

• ‘We did not let down our investors’ says chairman

• Northern is not just a bank, it’s our bank

• Northern Rock still lending ‘recklessly’

• Star investor stays bullish on banks

Man who stepped into limelight on a dark day

Alistair Darling, the Cabinet stalwart who shunned headlines, has become the Chancellor facing down a grave economic crisis

• Narrow Squeak

Brown points way to election fight

In an exclusive interview, the PM explains why ‘intensifying’ health service reforms will be the cornerstone of his appeal

• The most damaging run has been on our trust in you, prime minister

• Full transcript: Gordon Brown interview

• The Trivial Pursuit question Gordon is wary of asking voters

Related Internet Links

• Northern Rock company information

• Northern Rock share price charts

• Northern Rock company forecasts

Related Links

• Fund manager silent as investor value is hit

Clear signs are emerging that the twin engines that have sustained the economy in recent years – the high street and the housing market – are feeling the effects.

In the high street, recent sales activity has disappointed. Although poor trading has been worsened by the washout from a wet July, official figures from August due his week are tipped to confirm that growth in retail sales either stalled last month, or fell within a fraction of doing so.

News from the residential property market has taken a grim turn. A survey from the Royal Institution of Chartered Surveyors (RICS) last week suggested that average house prices are now falling for the first time in two years. That diagnosis was borne out by figures on Friday from Rightmove, the property website, which indicated that asking prices from home sellers dropped by 2.6 per cent last month.

With this worrisome backdrop left looking bleaker by the apparently growing impact of the worldwide crunch in the money markets, both at home and in America and Europe, it will not be surprising if the nation soon finds itself in a state of high anxiety over the economic outlook. The “R” word, recession, is being quietly murmured by some of the edgiest observers.

Just how bad, then, will things get? The good news is that, while the financial market upheavals of recent weeks have seen pundits in the City, on Wall Street and in the big international institutions such as the International Monetary Fund forced to rethink their rosy assessment of global prospects, a slump by the world or British economy into any sort of severe downturn still remains a relatively remote prospect.

Economists do expect Britain’s growth to slow markedly next year, after a prolonged run of very robust expansion. The consensus view is now that growth next year could fall to as little as 2.1 per cent, from a likely pace of about 2.8 per cent this year. A big factor in any slowdown will be an inevitable pullback next year in the headlong growth of the City, whose boom has made the financial sector a vital motor for Britain’s economy.

But there are still good reasons to keep a cool head. Today, the US Federal Reserve is set to bolster the American economy with a cut in interest rates and this will underpin global conditions.

Here, it is likely that further bad news from the housing market will soon be creating a climate of dread.

The reality is that history suggests that the sort of crash that many fear has required a trigger in the form of a sharp economic downturn and rising unemployment. With the Bank of England likely to follow the Fed’s lead and cut interest rates here to bolster growth. such scenarios still look farfetched.

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