In the panelled Court Room of the Bank of England, just below the ceiling, is a dial linked to the weather vane on the roof of its Threadneedle Street headquarters.

Two centuries ago, when it was erected, the vane told the Bank, quite literally, which way the wind was blowing for the economy. The strength and direction of the winds accurately predicted the arrival of ships sailing up the Thames to the port of London. Every time a ship arrived there would be a surge in demand for cash to pay for the cargo. So the weather vane enabled the Bank to make sure there was enough money available.

In the past few months the weather vane has been revolving more furiously than ever. The storms blowing across the global economy are buffeting Britain and other countries. Two big and malicious weather fronts – the credit crunch and a surge in world oil prices – are combining to create the toughest economic conditions for decades. The world, which for 15 years has been an economically benign place, is suddenly looking harsh and unpredictable.

These conditions are also, for the moment at least, producing a profound shift in the global balance of economic power. While America, Britain, Europe and Japan – the old powers – are struggling, plenty of other countries are making hay.

The credit crunch has crippled the West’s banking system at a time when record oil prices, which reached nearly $140 a barrel earlier this month, double their level of a year ago, are resulting in a massive transfer of wealth from the oil consumers to the oil producers: $1,800 billion (£926 billion) a year, according to Goldman Sachs.

While Britain’s builders are suffering their deepest downturn in living memory, it is boom-time in the Gulf as the oil-rich states spend their revenues on stunning new skyscrapers and executive homes and apartments.

Last week a dispute by fuel tanker drivers in Britain produced desperate calls from the government for motorists not to panic buy petrol. In Spain the situation turned nasty. A strike by lorry drivers protesting over record diesel prices led to empty supermarket shelves and factory shutdowns. One driver who broke the strike was badly burnt when his lorry was set on fire by the protesters. Other drivers have had to have police escorts. In Portugal the government bought off a similar strike last week by cutting fuel taxes and toll charges.

If it isn’t fuel, it’s food. Food prices have jumped by 55% in the past year, according to The Economist index, with the biggest increases in staple products such as corn, wheat, rice and soya beans.

For most consumers this means unpleasantly higher prices, but for the world’s poorest it means what the World Bank has called the “silent tsunami” of famine and death. There have been violent protests at food prices across Africa and Asia.

The credit crunch, meanwhile, continues to wreak havoc on western economies. On the stock markets it has become a race to the bottom as investors rush to unload their shares in banks and housebuilders.

Although there are tentative signs of improvement in the American economy, US house prices continue to dive. A crisis that began with a Klondike rush into so-called sub-prime lending – loans to “ninja” borrowers (no income, no job, no assets) – and an even bigger rush by the world’s banks into sophisticated financial instruments based on these same dodgy mortgages have produced what the International Monetary Fund has called the biggest financial shock since the great depression.

That shock has produced a mortgage famine for new borrowers in Britain. Lenders who, a year ago, were bending over backwards to hand out cash, now no longer have the funds and are strictly rationing their loans. The result, said the Royal Institution of Chartered Surveyors last week, is the sharpest downturn in transactions in the 30 years that it has been surveying its members. House prices are falling in an echo of the slump of the early 1990s. Housing in Spain, Ireland and other western countries has also turned down sharply.

What has caused these changes, how bad will the pain be and how long will it last? A FEW days ago, at its headquarters in the 16th arrondissement in Paris, the Organisation for Economic Cooperation and Development unveiled its latest thoughts about the world economy. The OECD, which started life in 1948 as the body that distributed America’s Marshall aid to war-ravaged Europe, now counts all the West’s advanced economies among its members.

The OECD has seen plenty of global economic crises during the past 60 years, but probably never anything quite as unusual as this one. What Jorgen Elmeskov, its head of economics, describes as months of “market turmoil” have left the outlook “particularly unsettled”. For an organisation whose natural language is understatement, this shows how worried it is.

The highly unusual thing about the turmoil is that while the OECD’s members are skirting dangerously close to recession, those who are not members of the club are enjoying an economic party. America is growing by barely 1%; Britain, Europe and Japan by roughly 1.5%. But in the rest of the world, growth rates of more than 7% are common, particularly in China, India and commodity-rich nations such as Russia and Brazil.

There have been big transfers of wealth to oil producers before, most notably in the 1970s. Rarely, though, has the world looked as lopsided as it does now.

The unbalanced nature of the global economy is one reason why things are so tough. In the past, a slowdown in the advanced economies hit demand for raw materials and energy and brought down their price. The oil producers of Opec held sway during the 1970s, but the power to set prices essentially rested with western consumers. That has now changed dramatically, as Elmeskov pointed out.

During the long upswing from the early 1990s, globalisation was a boon to western consumers. Countries such as China provided cheap manufactured goods which helped to keep inflation low. Not only that, but rather than spending all their new-found wealth these countries saved a sizeable chunk of it. This generated a world-wide glut of savings which in turn helped to hold down interest rates in the West.

Now, however, the West is seeing the flipside of the rise of China, India and the other emerging giants. Their demand for oil, food and materials “is an important factor behind high commodity prices”, the OECD says, and it is sustaining “tensions” in the markets for these basic products. We have had the benefit of cheap imported goods; now we are paying the price in higher prices for essentials.

We will be paying that price indefinitely, according to the Treasury. While speculation may have been a factor in the recent sharp rise in prices, consumers are going to have to become accustomed to paying more for food and energy than in the past, it concludes in new research.

“Prices are likely to remain higher than their historical averages, if lower than today’s levels, with continuing and perhaps more frequent shocks, driven by continuing strong demand and a continuing slow supply response,” the Treasury said. “This demands a strong response at a national and international level to protect the poor and continue sustainable economic growth.”

A rise in the global population from 6.7 billion now to 9.1 billion in 2050, and the need by 2030 for grain production to rise by 50% and oil production by a third, underline the scale of the problem.

“The era of cheap food is at an end,” said Tim Lang, professor of food policy at City University. “We have developed the view that consumers can get what they like when they want, and it is wrapped in plastic and arrives by truck. But that recipe is not going to carry on.

“I am not a Malthusian but the issue of feeding nine billion people as opposed to six billion is a lot of food. It needs land and we’re not making any more of it. There are no existing technical fixes to deal with the problem.”

What is true of food is, say experts, also true of oil. While mainstream opinion dismisses the idea that the world is already producing the maximum that it can – so-called peak oil – all agree that finding and developing new sources of it will be more difficult in the future.

BP reported last week that world oil production fell last year, despite strong demand, and predicted that global supply and demand would remain tight for the foreseeable future. Tony Hayward, its chief executive, blamed political factors and high taxes for restricting oil supplies.

“When it comes to producing more oil, the problems are above ground, not below it,” he said. “They are not geological but political.”

Those factors are not going away. Hugo Chavez, Venezuela’s outspoken president, predicted last week that oil would hit $200 a barrel and blamed “mismanagement” of America’s economy and the weak dollar. Gazprom, the Russian energy giant, said oil was heading for $250. Record oil prices are lining the pockets of the undeserving, whose glee at the discomfiture this is causing the West is undisguised.

WHEN times are tough, George Soros is never far away. He was the man who set the seal on Britain’s most turbulent recent economic episode, the “Black Wednesday” crisis that saw the pound forced out of Europe’s exchange-rate mechanism in 1992.

Now he thinks western economies are getting their comeuppance for decades of overexuberance. In his book The New Paradigm for Financial Markets, Soros describes a “super-bubble” that has been building for years. One aspect of that bubble was America’s housing market, but the other was an overreliance on financial markets – what he calls “market fundamentalism”.

“This time, the crisis is not confined to a particular segment of financial markets but has enveloped the entire financial system,” he writes. “This is the first time since the great depression that the international financial system has come close to a genuine meltdown.”

Larry Elliott and Dan Atkinson, in their new book The Gods that Failed, also lay the blame on financial markets and the investment banks that run them. Governments, they say, were dazzled by the bankers. “They promised economic stability, order and prosperity,” they write. “But, instead, the world’s bankers have delivered chaos, debt and uncertainty – and then blamed the feeble governments that surrendered control of the global economy to them.”

After the credit boom comes the hangover, which will last. That is why Britain and other countries are reeling under the impact of the credit crunch. It is why – although the international financial system may have been brought back from the brink – the economic repercussions have yet to play out fully.

Is this a rerun of the “stagflation” of the 1970s? Stagflation, the combination of economic stagnation or recession and high inflation, was coined by Iain Macleod, the Conservative frontbencher, in November 1965, when Harold Wilson’s Labour government was struggling with one of a long series of economic crises.

Macleod, briefly chancellor in 1970 under Edward Heath, died before he saw true stagflation. After the world reeled under the impact of Opec’s first big oil price rise in 1973-4, Britain saw inflation climb to 27% in 1975 and plunged into the longest and deepest recession of the postwar period. The global “golden age” of the 1950s and 1960s was replaced by something much darker and more threatening.

Few think that present conditions are remotely as bad. Derek Scott, who was an adviser to Denis Healey, chancellor in the 1974-9 Labour government, dismisses the comparison. “I think it is very different,” he said. “I don’t see a big inflationary threat at present. Most of the dangers are on the other side – very weak growth.”

While inflation is high in many of the fast-growing economies as a result of oil and food – on one calculation two-thirds of the world’s population will be experiencing double-digit inflation this summer – it remains low by past standards in Britain and other advanced economies.

Figures in America on Friday showed that even record petrol prices have pushed inflation only to 4.2%, similar to the rise in Britain’s retail prices index. Mervyn King, the Bank of England governor, is expected to have to write an open letter this week to explain why inflation on the government’s target consumer prices measure has risen above 3%. While this is embarrassing for the Bank, the figure is extremely low by past standards.

Scott, who subsequently became economic adviser to Tony Blair and has publicly criticised Gordon Brown, also thinks it is wrong to say that Britain is uniquely vulnerable to the shocks rocking the global economy because of Brown’s decision to stay out of the euro. “Britain is in a better position than most other European countries,” he said. Britain’s ability to set her own interest rates and allow the pound to move up and down provides a flexibility that other countries lack, he believes.

That may be of small comfort. The next 12 to 18 months will be rough going, with unemployment rising, businesses failing and inflation uncomfortably high. Even if it is not a recession, it will feel like one.

Worse, some of the changes will be permanent. The age of cheap food and energy is over. The days of easy credit will not return for years. A new era has started with an uncomfortable jolt – and it does not look nearly as nice as the old one.

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