THE bubble was bound to burst sooner or later. The Government may have set out to end boom and bust, and Chancellor Gordon Brown may have been able to boast of 50 quarters of successive growth - even if that meant including five Tory years - but no-one believed the thriving economy would last for ever.

Now, it seems the indicators are going in the wrong direction. For eight years, Mr Brown has proved his critics wrong, and his optimistic forecasts were consistently more accurate than their more downbeat predictions. But now, the doom-merchants at last have something to crow about.

So what is happening to Labour's economic miracle? Is a recession on the cards? And what does this mean for interest rates and taxes?

Q What are these depressing economic indicators?

A The last few days have seen a deluge of bad news. Figures published by the British Retail Consortium this week showed that High Street sales were 4.7 per cent lower last month than in April last year, the biggest fall since the study began, ten years ago. Manufacturing also reported its worst figures since 1995, a 1.6 per cent drop in production between February and March.

The housing market, which was behind much of the economic success of recent years, is also stuttering. Last month, the Nationwide Building Society reported a 0.6 fall in house prices, the biggest monthly drop for almost ten years, and the latest figures from the Land Registry show house sales are down 35 per cent on a year ago.

Q Why are retail sales falling?

A The fall in High Street sales can largely be laid at the door of the housing market, according to Anthony Platts, assistant director of Teesside stockbrokers Wise Speke. When house prices were rising rapidly, more people borrowed against the increasing value of their home. Now the market is levelling off, that money is no longer there.

"There has been an awful lot of equity withdrawal and you get the feeling that it has all been spent now," says Mr Platts. "Without the booming housing market, people are having to rely on ordinary incomes, which have only been going up in line with inflation, which is historically low. The result is there is not so much money available to spend on the High Street."

Q What is happening to the housing market?

A Relative to the double-digit rises which have become the norm over the last few years, the housing market is in a relative slump, but it is still fundamentally sound, according to Ian Hillis, economist with the Halifax. He says low interest rates, low inflation and low unemployment, all combine to maintain confidence in bricks and mortar. The Halifax is forecasting a rise in house prices of about two per cent this year.

"Given the very large rises in the previous four years, it means everything becomes slightly more affordable and stabilises," he says. The Halifax's view of interest rates is that they have peaked at 4.75 per cent and they are expected to fall back to 4.25 per cent by the end of the year.

Q What about manufacturing?

A If the retail and housing markets may be victims of short-term readjustments, as a booming economy takes a breather, the problems may go a little deeper in the manufacturing sector. And as 20 per cent of the economy, manufacturing cannot be easily dismissed.

"The problem with manufacturing is in competing with cheap imports," says David Barlow, lecturer at Newcastle University Business School. Foreign competitors have lower costs than British manufacturers, meaning they can produce goods to sell in the UK cheaper than home-grown companies. And it is not only imports which are the threat.

"One of the problems is the weakness of the dollar, which means the Americans can't afford to buy things from us, and as we're more dependant on trade outside the eurozone than other EU countries, this affects us more," Dr Barlow adds.

The price of oil, above $40 a barrel for some months now, also hits manufacturing particularly hard, according to George Cowcher, chief executive of the North-East Chamber of Commerce. And he says the Government is reluctant to tackle underlying structural problems in the sector.

"Clearly there are difficulties in terms of competing and pressure on the cost base, and there is no great appetite in the Government to really address what are fundamental weaknesses in manufacturing," he says. "We have been able to mask these problems over the last few years because there has been this constant demand, but when you begin to go into a less favourable climate that is not the case any more."

Ministers' ambivalence to promoting international trade, the lack of investment in research and development and failure to keep up with the demand for skilled employees and sort out transport problems, have all hindered the ability of manufacturers to keep pace with the rest of the world, he adds.

Q Is there a real cause for concern?

A There is no doubt that the conjunction of adverse economic indicators in the manufacturing and retail sectors is worrying, says Mr Cowcher. Five interest rate rises in the last 18 months and political uncertainty over the result of the General Election have combined to produce a somewhat gloomy outlook.

"It does give added impetus for the Government not to automatically assume that the economy is going to progress as it has done over the last four or five years," he says. "We have been used to the great British shopper going out and buying regardless, sustaining a whole series of retail and service businesses, and they may well find it difficult if the great British shopper ceases to spend that money."

The anxiety amongst businesses, he adds, is that the response to inflationary pressures will be to raise interest rates, which would further damage demand.

Q Are we heading for a recession?

A Although we may be experiencing an economic downturn, there is no sign yet that this will turn into a recession, according to Newcastle University's Dr Barlow. Instead, the landing from our economic boom is likely to be a soft one.

"We're coming down after a reasonably good time, but the economy is just correcting itself," he says. "There will be somewhat slower growth and perhaps an increase in unemployment, but that is starting from what is a very low level."

This view is backed up by Wise Speke's Mr Platts. Away from the retail and manufacturing sectors, companies have been performing reasonably well, giving rise to optimism that the outlook is not that bleak.

"I don't think there is going to be any crash landing as such," he says. "Pay levels are going up with inflation, prices are not rising faster, it is just that we're not going to see some of the retail sales figures we saw in the first years of the 21st century.

"It is not something we need to worry about immediately, but we will need to monitor it quite closely."

These sentiments are shared by the Chamber of Commerce's Mr Cowcher. He says: "We shouldn't talk ourselves into a totally depressed state, but it is important that we make sure this downturn in demand is being given proper attention."

Q Will taxes rise?

AEven if a recession is avoided, there seems little doubt that taxes will have to go up, according to Mr Platts. "If retail companies are not making as much money, not as much corporation tax being paid into the Government coffers as the Chancellor would like and that hole has to be filled, so tax rises become an increasing possibility."

The Government was keen to play down the possibility of tax rises during the election campaign, but a consensus among economists is that taxes will have to go up to pay for its spending plans. With ministers ruling out a rise in income tax, national insurance, once again, looks a likely target.

"If there was a penny on national insurance it would make quite a difference, especially with council tax rises and a revaluation which could mean even higher bills," says Mr Platts. "That is going to make matters worse, because there is going to be even less money to spend on the High Street."