So is the economy heading for a fall?

• Larry Elliott, Guardian economics editor

A couple of months of poor retail sales figures and suddenly the talk is of the economy heading for the rocks. Let's be blunt. Britain has some serious long-term economic problems - encapsulated by the symbiotic relationship between a declining manufacturing base and a widening trade deficit - but it is a long way away from being in recession.

There are certainly signs that the economy is slowing. One measure of unemployment - the number of people out of work and claiming benefit - rose in April for the third month in a row. Manufacturing output, affected by the collapse of Rover but also by the loss of jobs to cheaper locations in Asia, fell sharply in the first three months of 2005. There are definitely signs from the high street that consumers are tightening their belts. But these developments need to be put in perspective. When the economy was grinding through the recessions of the early 1980s and early 1990s, unemployment on the claimant count measure was hovering around the three-million mark; today it is well under a million. True, the unemployment figures don't tell the whole story; there are well over two million people classified as long-term sick or disabled, but employment in the UK is pretty close to record levels. What's more, overall growth may be slowing, but it is far from negative. Early estimates suggest the economy expanded by 0.6% in the first quarter of 2005, and although that figure may be revised down a bit, the data points to a country chugging along in second gear rather than stuck in reverse.

In one sense, some slowdown in the economy is to be welcomed. The past few years have seen a binge of consumption, fuelled by borrowing, often on the back of rising house prices. The Bank of England raised interest rates in five quarter-point steps from late 2003 to the summer of 2004 in an attempt to cool things down a little. It still expects the economy to grow by around 2.5% this year. If things get a little too chilly, it has plenty of scope to cut interest rates from their current level of 4.75%.