Blair faces tougher economic outlook

Low inflation, low unemployment and solid growth - vote for our economic record, Prime Minister Tony Blair had begged the British people before yesterday's election.

But as his Labour party starts an unprecedented third term with a much reduced majority, there are growing signs the jewel in the Blair government's crown is losing its sparkle.

Pinched by higher interest rates, rising fuel bills, the end of the house price boom and the threat of higher taxes, Britons seem to have finally called time on a spending spree that has powered the world's fourth largest economy for years.

Analysts say finance minister Gordon Brown's forecast of 3-3.5% growth for this year is optimistic.

Figures out just this week showed retail sales falling at their fastest pace since the early 1990s slump and companies have been lining up to bemoan the waning feel-good factor.

Home improvement retailer Kingfisher, general store Argos and music seller HMV Group have all blamed falling sales on downbeat shoppers. Meanwhile, pub and leisure group Whitbread has warned of spending easing and gym group LA Fitness said membership was going down.

The Bank of England's greatest fear - a sharp consumer retrenchment - appears to be turning into reality and many analysts predict interest rates have peaked at 4.75% and will have to come down later this year.

Returned to parliament for his constituency of Kirkcaldy and Cowdenbeath with a huge 18,212-vote majority, Brown showed no sign of worry. 'Our purpose will be to maintain and entrench our economic stability and prosperity,' he said in his acceptance speech.

But economists said Brown had little leeway to cushion any economic slowdown as he did after the collapse of the dotcom boom in 2001 by massive increases in public spending.

Most are already predicting the government will have to raise taxes by around £10 billion sterling a year so as not to break its golden rule - that it only borrows to invest over the economic cycle.

Analysts said that any sharp slowdown and consequent rise in unemployment would only exacerbate the strain on the public finances and Blair's reduced majority meant that it might be harder for the government to look for any savings.