BUSINESS is warning of a “toxic mix” for Britain’s economy of sharply weaker growth and profits alongside powerful inflationary pressures. This poses a growing dilemma for the Bank of England, which held off cutting interest rates last week but is widely expected to cut next month.

According to Ernst & Young, profit warnings from UK-quoted companies have hit their highest level since the final quarter of 2001, when the economy was rocked by the fallout from the September 11 terrorist attacks on America.

Meanwhile, this week’s British Chambers of Commerce (BCC) quarterly economic survey is said by insiders to be “flashing red”. Output, orders and expectations are all down sharply, except for firms’ expectations of price rises, which are at a record high.

A YouGov poll of more than 2,100 voters for today’s Sunday Times shows that people are gloomy about economic prospects, with 34% expecting a slowdown, 21% no growth at all, and 22% a recession.

By 41% to 14%, people think their family’s finances will get worse over the coming year. Perhaps surprisingly, however, they say by 38% to 23% that their discretionary spending is higher now than it was a year ago.

The Ernst & Young profit figures show there were 107 profit warnings in the final quarter of last year, up by 22% on the same period in 2006 and the highest since late 2001. A fifth of firms blamed the credit crisis.

The most warnings came from support services, with 22, followed by general retailers, 12, media, 10, software and computer services, nine, and travel and leisure firms, eight. A flood of warnings from retailers is expected in the first quarter.

For last year as a whole, there were 384 warnings, again the highest number since 2001. “By the end of 2007, the question of whether the impact of the credit crunch would spread beyond the financial sphere was answered by a wave of ‘credit crunch’ profit warnings from nonfinancial corporates,” said Keith Mc-Gregor, corporate restructuring partner at Ernst & Young. “The UK economy will slow in 2008; the only question is by how much.”

The BCC survey of nearly 4,600 firms, 1,300 in manufacturing and construction and the rest in services, will be published on Thursday.

It is set to show that all the main balances associated with growth – orders, output, exports and investment – were down in the latest quarter. The figures are consistent with a sharp slowdown in growth, though not a recession.

However, the survey also shows that both business and the public are expecting higher inflation in the coming months. Weak growth could, however, prevent firms from passing on the costs.

David Kern, the BCC’s economic adviser, said early action was needed from the Bank to support the economy. Last week it left Bank rate unchanged at 5.5%.

“Delaying a cut could worsen the downturn in the economy,” said Kern, who expects a 5% Bank rate by mid-year.

Figures this week will show how much room for manoeuvre the Bank has to cut rates. A survey of analysts by Ideaglobal. com shows that consumer price inflation is expected to stay close to November’s 2.1% rate, while retail sales will have posted a modest 0.2% gain last month. Most analysts think the Bank will cut next month.

- Two of Britain’s leading stock market analysts have warned that UK shares will be gripped by a bear market that could see the FTSE 100 dive more than 1,000 points to below 5,200.

Brian Marber, the respected chartist, last week called the bear market based on his analysis of charts and trends. According to Marber, the nine bear markets since the early 1980s have seen falls ranging from 13.8% to 48.6% – an average of 24.4%.

His analysis reveals that bear markets usually surrender at least 38% of the gains achieved in the preceding bull market. If this were to be repeated, the FTSE 100 would plummet to 5,126 or 24% below the index’s high in June.

David Schwartz, the leading stock-market historian, argued that FTSE small cap shares have “already entered bear market territory”. At the most recent low-point in the run-up to Christmas, the index was down by 22% on its peak six months earlier.

Strategists call a bear market when an index has fallen by more than 20% from the peak. On Friday morning the FTSE 250 index slipped into bear market territory after passing the 20% barrier. However, by the close the index had recovered to close up 29.2 at 9829.8.

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