London Briefing: There is probably only so much bad news that the British consumer can take. Tabloid newspapers and other shrill commentators have been warning for at least the past three years that property is about to crash.

Anyone who followed this advice in the first couple of years is, of course, going to be seriously out of pocket even if prices do decline by as much as 20 per cent from here. But the forecasts of a property crash simply grow louder.

If that wasn't bad enough, more recently we have had a never-ending series of media stories about the looming pensions crisis and how we are all going to be impoverished in our old age. But to add icing on the cake, we now see the first forecasts of a sharp rise in unemployment beginning to emerge from City commentators, most of whom also seem to expect hefty tax hikes over the next few years.

It is no wonder that spending is starting to wilt under this barrage of bad news. What should have been a relatively mild slowdown in consumer spending is threatening to turn into a slump.

Consumer confidence, usually impervious to the headline-grabbing gloom merchants, is falling, not least because of the lagged effects of high interest rates but also in the face of a veritable onslaught of expert opinion telling shoppers that their incomes are under threat and that they should save an awful lot more because of a very uncertain future.

Morrison's, the large food retailer that bought Safeway last year, last week joined the list of high-street names sounding a downbeat note.

The Bank of England, having played a blinder until now, is facing its sternest test. The slowing consumer has taken the Old Lady by surprise and it is clear that the bank's experts are very unsure whether the recent slowdown will prove temporary.

While interest rates have gone up, they have not yet risen to the point where real pain is being felt. Technocrats like the bank's economists will be loathe to point at deteriorating consumer psychology, rather than at more measurable things like disposable incomes and employment. But there is no doubt that sentiment is sliding.

The real question for the bank is when to cut interest rates. While the past affects of higher oil prices, in particular, keep inflation high, there may be little wiggle room in terms of the inflation target. But it will probably have to accept some small overshoot of inflation while beginning the rate-cutting process.

We have grown so used to inflation coming in under the target that we have forgotten that the bank can accept a rate up to 3 per cent before it has to write a letter to the Chancellor.

Can the bank begin a rate-cutting cycle while inflation is still on the rise? Given that it is supposed to target future inflation there is no logical reason why it should not, provided, of course, that its forecasts do show inflation remaining on target.

The history of the past 25 years of UK economic policy can be neatly summarised by the micro reforms of Margaret Thatcher combining with the macro innovations of Gordon Brown - essentially, that decision to make the bank independent - to produce the longest uninterrupted economic expansion ever.

Brown's critics, this column included of course, reckon that he has unwound many of the gains of the Thatcher years: nearly half of the UK employment miracle so envied by the high-unemployment countries has been as a result of the hiring binge by the public sector. Because structural changes to the economy take so long to have their effects, the huge expansion of the public sector is a subject of fierce debate with concerns often expressed that Brown is undoing a lot of the good work of the past. And the more the UK comes to resemble a European economy the more we worry: the latest EU initiative to restrict the working week to 48 hours is a piece of risible economic nonsense almost designed to frustrate those of us who would like to like Brussels.

The most obvious British economic success of the past few years has been a well-functioning labour market.

Economists may disagree about most things but if they are united about one thing it is the fact that the more you make your labour market like that in Germany or France, the more certain it is that you will have unemployment at least twice the rate it is today.

Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.