Threats that the economy will be in the grip of a deepening downturn before the end of the year are mounting, the Organisation for Economic Co-operation and Development said yesterday.

Interest rate cuts may soon be needed to shore up Britain’s growth as financial turmoil combines with the toll on the high street and housing market from past rate increases, the Paris-based think-tank for rich nations said.

Despite a robust showing by the economy so far this year, the Bank of England should now be ready to act to underpin activity, the OECD argued, as a spate of new figures showed further signs of worsening prospects.

“The outlook for growth and inflation has now become more uncertain and there is a risk that growth will be weaker going forward, which would imply a need for interest rate reductions,” the OECD said. “Higher interest rates, together with recent financial market volatility, are expected to have a moderating impact on consumer spending and slow the pace of house price inflation.”

The warning amid more indications that a slowdown in high-street sales and house prices is taking hold, in spite of conditions having held up in the second quarter. Fears of yet more market upheavals were stoked as Anthony Bolton, of Fidelity International, one of the City’s star fund managers, said that Britain may now be in the first stages of a bear market.

In the high street, a CBI survey of retailers showed that last month saw the weakest sales growth this year, as a deterioration of conditions since May persisted.

There were also further signs that the housing market is losing steam. Nationwide Building Society reported this month that prices in the third quarter rose by only 1.6 per cent, down from 2.2 per cent in the second. Mortgage approvals by leading banks, seen as a gauge of future housing market conditions, slid by 14 per cent from a year earlier in August, with just 61,000 new home loans.

Meanwhile a Goldman Sachs report gave warning of a new recession in Japan and a growing risk that the US property slump may spread to Europe.

Economists cautioned that the Bank of England was likely to remain reluctant to be rushed into rate cuts, given recent strength in the economy and persistent inflation worries. An official estimate of growth in the dominant services sector in July, at a buoyant 0.3 per cent, suggested that the third quarter saw GDP continue to forge ahead.

The OECD also sounded a warning over the impact of a weakening economy on stressed government finances. It said that a drop in City profits triggered by market turmoil was likely to hit tax revenues and drive up public sector borrowing. That would leave the Chancellor less scope for using fiscal policy to ward off a downturn.

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