Could the British economy beat the US in a headlong slide into recession?

The Bank of England meets to discuss interest rates in a day chat starting tonight but the betting in London has swung from no rates cut 10 days ago to, on balance, a desperately needed cut as the flow of poor figures and stark warnings have emerged from regulators, banks, retailers and investment bank economists.

The Bank of Canada cut its key rate overnight because of the pressure of the credit crunch, and the Reserve Bank of Australia left its key rate unchanged today because of the tightening credit conditions, which outweighed inflationary concerns. Now the Bank of England is in a similar position, starting tonight, as it confronts a series of warnings that Britain seems to be rushing headlong into recession.

Retail sales are faltering: the big retailer, Tesco has just reported a solid 4.1% rise in first quarter same store sales, but that was down on the 5.6% store sales rate in the same quarter of last year. A host of retailers from jewellers to food and some larger discount chains have warned on sales growth and earnings in recent days, while figures show the number of new home mortgages sold are sliding rapidly. Building and construction is easing.

It seems Britain is undergoing its very own sub-prime mortgage shock in a similar fashion to the US: there’s the rising problem of people with what we call no doc loans fixed rate in Australia who will have to refinance at higher interest next year, and the lenders have been hurt badly by investing in these and associated credit derivatives, not to mention investing in the toxic US sub-prime mess and associated credit securities.

For some banks in the UK, it’s a double or triple whammy that they didn’t expect and they have tightened lending standards and slashed the amount of money available for housing, and cut lending to everyone, including other banks.

The interbank money market credit squeeze is more ferocious in Britain than anywhere else at the moment and the key indicator, the London Interbank Offered Rate (or LIBOR) is at a record premium to similar benchmarks in the US, which in turn is driving up the cost of mortgage refinancing for sub-prime borrowers on both sides of the Atlantic.

Britain’s top financial regulator said more than a million people could find it tough to refinance their mortgages next year as the turmoil in financial markets deepens.

The pressure has become so high that Britain’s financial regulator yesterday went public with a very pointed warning to banks and other mortgage providers. The country’s Financial Services Authority warned mortgage lenders to batten down the hatches as it told them to assume that market conditions will remain “very difficult for a sustained period”.

Earlier in the week the London office of US investment bank Morgan Stanley advised its clients to step back from Britain’s debt-laden economy, warning that the FTSE 100 stock index may fall 16% over the next year as the credit crunch forces banks to curb lending.

“The ongoing financial crisis will have a significant detrimental impact on economic growth,” the bank’s UK equity team wrote. “We believe house prices will fall 10pc next year, with the possibility of further declines into 2009. Investors should beware those stocks exposed to a sharp slowdown in housing activity.”

Of all the major western economies, Britain is more exposed to a financial sector meltdown because of the importance the City of London, where the sector is based, to the national economy.

According to estimates in this week’s Economist Magazine and in several London research papers published in the media, “The City” can account for 30% of company tax revenue for the central government, and a significant share of the country’s 1% of top taxpayers who pay 22% of income tax collected from individuals.

Last Thursday, the head of the Bank of England, Lord King warned that the central bank was being buffeted from both sides. He said rising food and oil prices were putting upward pressure on inflation while the “continuing turmoil in financial markets” was tightening credit conditions, particularly in the housing and commercial-property markets.

He said the short-term outlook, King said, was “rather uncomfortable”, and the Bank faced a difficult task negotiating its way through this “highly uncertain” environment.