The British economy is in big trouble. I say this as someone who has stuck his neck out since the mid-1990s in arguing that the British model was basically sound and that the UK would defy all the sceptics and turn out to be the world's strongest and most stable leading economy.

But the outlook has been transformed by the summer's credit crunch, exacerbated in Britain by Gordon Brown's dithering response to Northern Rock and the misconceived tax changes he introduced in his “pre-election” mini-Budget. Britain now faces the worst economic prospects since the early 1990s and a high probability of the sort of property bust now playing havoc with the US economy.

When the Bank of England announces the results of its Monetary Policy Committee meeting at noon today, let us hope it responds to the impending danger with an interest rate cut of at least half a point.

The quarter-point reduction expected in the City would not be remotely sufficient. Neither, on its own, would a half-point cut. But at least such a bigger than expected move would show that British policymakers had recognised the seriousness of the threat and might be prepared for the sort of radical action now seen in the US. There, the Federal Reserve Board slashed interest rates last month to 3 per cent from 4.25 per cent and President Bush has united with his opponents in Congress to agree on a $150 billion emergency tax cut.

Why has my language turned so apocalyptic? First, because conditions in the US economy and financial system have deteriorated drastically in the past few days. Secondly, because Britain, contrary to widespread belief, is at greater risk than America from the global financial crisis. Therefore if conditions deteriorate further in the United States then the outlook for Britain will become truly dire.

Starting with the US economy, two crucial recent statistics - the January employment figures published last Friday and the survey of purchasing managers on Tuesday this week - revealed such enormous setbacks that they suggested the US economy may well have proverbially “fallen off a cliff” at around the turn of the year. Although these figures could still be revised upwards or prove to be temporary aberrations, such sudden statistical lurches often occur at the start of a recession - implying that the probability of a serious contraction in the US economy is much higher today than it was even a week ago.

Now for the second, more important point. Even if the US averts recession, Britain faces a difficult period - in all likelihood at least as bad as America's slowdown and housing slump of the past 18 months. And if the US does suffer a full-scale recession, in the process paralysing a significant part of the world's financial system, then the British economy could face an outright disaster.

British growth in the past 15 years has depended almost entirely on three sectors - finance, housing and the public sector. Between them, they employ about one third of the workforce but have accounted for 120 per cent of employment growth. In other words all the other parts of the British economy have, in aggregate, been shrinking during those boom years.

Britain's specialisation in finance and business services has yielded big benefits in terms of higher living standards, since financial services have grown enormously in value in comparison with the manufactured goods that Britain imports. But this specialisation has also left the economy more narrowly focused, some would say unbalanced, and at risk from financial shocks.

To make matters worse, Britain has had two mechanisms for spreading wealth from the burgeoning financial sector to the rest of the economy. One was public spending, which has redistributed income from the financially driven economy of London and the South East to the rest of the country. The other was a house-price boom, which allowed existing homeowners to share in the prosperity of the financial sector, either by selling out to bankers or by remortgaging on the basis of house prices inflated by the bankers' wealth.

In the year ahead, all three of the British economy's driving forces are shutting down. City job losses will surely increase in the year ahead, exacerbated by the tax-raids on foreigners that started with the mini-Budget. In the public sector, the increase in employment came to an end last summer and wages look like falling in real terms for the first time in a decade. Most worrying is the state of the housing market.

The housing and mortgage boom has been much more extreme in Britain than in America. British mortgage borrowing at the beginning of 2007 was 125 per cent of disposable income, compared with 103 per cent in the US. House prices have risen this decade by 85 per cent compared with just 60 per cent in the US. In America, the ratio of house prices to personal incomes in mid-2007 was just 13 per cent above its long-term average; in Britain the gap was 51 per cent. Moreover, house prices in America have already fallen by about 7 per cent and, by the time this slump is over, they are expected to be at least 15 per cent below their 2005 peak.

So how far could house prices fall in Britain? The Halifax says it expects zero growth in the next year or two. The most pessimistic City forecasters predict 5 or 10 per cent declines. But why shouldn't Britain experience at least the 15 per cent decline that everyone in America now takes for granted? Many people think this impossible, but between 1989 to 1994, house prices in London fell by 29 per cent - and I haven't even mentioned the likelihood that much of the foreign money that has sustained the capital's market in recent years will flow out of Britain after the April tax changes.

All in all, Britain is vulnerable to a housing and financial crisis. A setback for finance and housing would not in itself be disastrous. It could even be healthy if other parts of the British economy pick up to fill the vacuum of jobs and demand. This is what is happening now in the US, where exporters of high-value manufactured goods are enjoying boom conditions.

But for Britain to enjoy such a manufacturing revival would require very different policies from the ones pursued by successive governments in the past 20 years - for example, we shouldn't be pumping tens of billions into a bankrupt mortgage bank while denying tens of millions to scientific and industrial projects. For the moment, however, the top priority is for the Bank of England to recognise the danger Britain faces. The way to do this is to cut interest rates today by at least half a point.

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