Yesterday’s confirmation that the Bank of England considered cutting interest rates by more than the dramatic 1.5 per cent reduction earlier this month did nothing to calm investors’ nerves.

The minutes of the Monetary Policy Committee meeting make clear that members decided against a bigger cut largely for tactical reasons. The outlook was so grim that they wanted to keep some ammunition in reserve to support confidence as the economy weakened. The chilling truth is that the outlook has deteriorated markedly since their meeting.

BASF, the world’s largest chemicals company, said yesterday that it had seen a significant cut in orders in the past three weeks. Some British retailers have privately admitted that trading appears to have taken another step down in the past ten days.

The speed with which things seem to be going from bad to worse has spooked investors. The FTSE 100 tumbled almost 5 per cent yesterday, only edging back above the 4,000 mark just before the close.

One of the particularly unnerving factors highlighted by the Bank of England was the drying up of trade credit. Given that companies are struggling to borrow from their banks, this is putting tremendous pressure on their working capital.

On the high street, trading is hard enough for giants such as Marks & Spencer, which is launching a one-day 20 per cent off sale. For smaller retailers, with less robust balance sheets, it is even tougher.

DSG International, the former Dixons, and Woolworths have suffered from the withdrawal of credit insurance that guarantees suppliers will be paid. DSG shares fell almost a third yesterday as its house broker cut estimates ahead of next week’s figures. Woolies was down even more as it confirmed our report that it was in talks to sell its retail arm for £1 to Hilco.

Reviving the Woolies stores may look a hopeless task in current conditions. But Hilco does have a remarkable record of bringing the half-dead back to life. These are the restructuring experts who hacked away at the debts of Focus, the DIY retailer, and made a nice turn on the break-up of Allders, the crashed department store.

Most improbably they even made money buying and selling Ciro Citterio, the tacky menswear retailer best known for clothing Finchy, the sleazy salesman from The Office, the TV comedy .

The medicine is likely to include shutting loss-making stores, finding buyers for leases of others and cutting back on the plethora of product ranges in the chain.

But the terms on many Woolies leases are said to be onerous and finding buyers for stores in the current climate is likely to prove stickier than a toddler’s fingers after a trip to the pick’n’mix counter.

Assuming Hilco does buy the business, this is probably the last roll of the dice for Woolies and other retailers are likely to be looking on nervously.

Any attempt to run Woolies for cash, slashing prices aggressively in the run-up to Christmas, could hurt competitors such as Game Group, HMV and even WH Smith.

One possibility floated by some analysts yesterday would be for Woolies to be remodelled as a “pound store” – a format that has been successful for the likes of Poundland.

This might seem appropriate for a company that was relegated to penny share status some time ago. But if we really are heading for a deflationary slump, that end of the market may get just a little bit crowded.

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