The economic downturn, which began in late 2007, looks to be drawing out into 2009 and beyond.

Indicators are showing a laboured but growing economy, more akin to a cooling economy rather than a total freezing.

It is views shared by many analysts who are now expect higher energy prices and inflation to limit growth.

The Council of Mortgage Lenders (CML) has added to the pessimistic view by forecasting a continued decline in housing prices in 2008 as buyer delay purchases.

According to the CML it expects a decline in housing prices in 2008 of around seven per cent.

“In the wake of the credit crunch, 2008 will be remembered as a very weak year in the housing market,” CML director general Michael Coogan said. 

But our forecasts assume some indirect benefits from the Bank of England special liquidity scheme beginning to have an effect in the mortgage market in the later part of the year,” he said.

It seems that times are changing and more people are expecting a long and slow recovery.

The CML’s last forecast predicted a return to growth towards the end of 2008.

The credit crisis was the catalyst for the current woes but it is the ongoing threat of high inflation that will keep a lid firmly on any recovery.

The inflation risk is enormous and no central bank can afford to sit back and wait for the economy to turn around with low interest rates.

Interest will rise and rise sharply.

No amount of liquidity will boost lending when customers are faceing rising interest rates and inflated petrol prices.

The days of lower interest rates are numbered.  The inflation beast has been ignored too long and it is going on a rampage.

The booming markets such as China and India are suffering under high inflation the most.  China’s inflation rate is maintaining levels at more than 8 per cent.

And despite the US data yesterday showing that inflation was rising slower than expected, the country is in a period of sharp economic downturn when inflation rates are expected to be under downward pressure.

The upward pressure on inflation is a worldwide phenomenon which could end the era of low interest rates.

In Japan the inflation rate is continuing to push up to levels that could cause a inflationary crisis.

Many economies are starting to question if interest rate management is an effective tool in the fight against inflation.  Considering that small changes have a strong and immediate impact on households with debt but such a delayed and relatively minimal impact on inflation. 

Inflation seems to be moving independently of other economic activity, and the question that many governments are asking their central banks is short of price fixing and wage freezing is there a more effective way of reducing inflation in the economy.

It is a question that may need answering as the Bank of England warns that inflation pressure continues to rise because of the cost of food and energy.

Early this week the UK central bank governor, Mervyn King, said slow growth and rising inflation requires delicate balance from the central bank.

“The monetary policy committee is facing its most difficult challenge yet,” Mr King said.

“We are traveling along a bumpy road as the economy rebalances,” he said.

“The worst is over.”  It is a cry coming out of the US at the moment as mortgage data shows signs of support, consumer spending is up and the employment rate improves.

Many people are now asking if the slowdown was really all that bad.

True, there has been a credit crisis and the financials have been hit hard, but other sectors such as IT and energy have held up in the face of the slowdown.

IT is usually the first to suffer any loss in business confidence as businesses scale back spending in that area. Yet revenue of most IT companies is maintaining strength.

Energy prices also dive because of diminished demand, but oil hit records this week.

Finally there is the US growth; technically two quarters of negative growth constitutes a recession.

The US is yet to register one period of negative growth in this latest slowdown.

Will it happen? Probably not…the US Federal Reserve’s emergency relief will filter through the market sooner rather than late.

There might be one quarter of contraction but not two.

This might not be the best news for the UK with energy prices coming under further pressure and a central bank looking over its shoulder at rising inflation.

We might have a consumer driven recovery so interest rates will most likely be under pressure for some time yet.