NOW that St Michael has been consigned to the dustbin of Marks & Spencer’s history, we have to look to Sir Stuart (Rose, that is) for guidance from on high about the outlook for consumer spending.

That guidance, following M&S’s gloomy results, was bleak and chimes in with that of some economists. Trading conditions in the high street will be eyewateringly tough and the gloom could extend into 2009, he said. Clothing is suffering its toughest time for a decade. Prices of nonfood items are down 6% year-on-year, despite rising costs.

The stock market has delivered its verdict on this, and now economists will be busy factoring it into their forecasts. They may get even gloomier about the spending outlook, although M&S seems to have suffered in comparison with some of its rivals, particularly the supermarkets.

So how much will consumer spending slow? And how much does it need to slow given continuing worries about inflation and the balance of payments?

In the third quarter of last year, which we should probably regard as an age of innocence before the credit crisis changed everything, consumer spending showed a rise of 3.6% on a year earlier – not a boom but certainly very strong.

This year, according to the average of recent forecasts, spending growth will be less than half of that, 1.7%. Michael Saunders of Citigroup, who topped my forecasting league table for accuracy last year, thinks the shift in mood will be even more dramatic than this, with only 1.1% growth in spending this year, rising to a mere 1.4% in 2009.

Not since the last recession ended in 1992 has consumer spending been so weak. To paraphrase M&S’s advertising slogan: This is not just a slowdown, it is a recipe for savage retrenchment on the high street.

Long experience has taught me that you write off the British consumer at your peril. One factor that has been overhyped is the mortgage “reset” as people come off existing fixed-rate mortgages onto higher ones. According to an analysis by Barclays Capital, this is a red herring. The maximum pain from resets this year will be £2.1 billion and the likelihood is of something significantly lower.

But on the basis of a stagnant housing market, weak real-income growth and a degree of debt aversion – and perhaps even a bit of an appetite for saving – a number for spending growth this year of below 2% seems entirely plausible. The question, though not obviously one retailers want to hear, is whether it is weak enough to rebalance Britain’s economy.

In the third quarter of last year, as many readers will know, there was a shocking £20 billion current-account deficit – 5.7% of gross domestic product. As I hinted last week, there are reasons to question some aspects of the figures, particularly the sharp shift in investment income. But the fact is that there is a substantial payments gap, which has contributed to sterling’s recent fall.

Figures last week showed the trade deficit in goods in November was £7.4 billion, the same as in October. This was lower than in the July-September period, when it averaged £7.6 billion, but not so you would notice.

For those who like big numbers, our trade deficit in goods is on course for £84 billion for 2007, up from £77 billion in 2006. The deficit with Germany is likely to have been £18 billion and that with China nearly £15 billion.

Britain still runs a sizeable surplus in services, so the overall number for the goods-and-services deficit is likely to have been £48 billion last year, not much worse than 2006’s £46.4 billion, but still a lot of red ink.

People often ask me why deficits such as these do not lead to immediate economic repercussions or a greater sense of crisis, as used to be the case. The answer is that these days, flows of goods and services are dwarfed by capital flows, and Britain has been pretty good at attracting those.

In 2006, the latest full year for which official figures are available, Britain attracted £80.3 billion of foreign direct investment, partly offset by £49.4 billion of investment abroad by UK companies. Short-term capital has also been attracted by Britain’s higher interest rates.

It cannot, however, be a permanent way of life for British consumers to spend willy-nilly on imports, financed by foreigners taking an ever-bigger stake in the economy. Richard Jeffrey, head of research at Ingenious Securities, sees the current-account deficit as “an obvious symptom of overheating”, and points out that it has risen from only 1.3% of gross domestic product (GDP) in 2003 to a likely 4.9% last year. That is perilously close to the 5.1% red ink of 1989, the height of the Lawson boom and just ahead of the long and painful recession of the early 1990s.

There are differences. In the late 1980s the North Sea still gave Britain a healthy trade surplus in oil, whereas now there is a deficit, so the true extent to which consumers were sucking in imports of other goods was greater. That is not surprising; back then consumer spending peaked at more than 8% real growth, very much higher than recent rates.

Even so, the current account did improve in the years after that 1989 low point as a result of a deep consumer recession – a peak-to-trough fall of 3.6% in consumer spending between mid1990 and early 1992 – together with sterling’s substantial devaluation following Britain’s exit from the European exchange-rate mechanism. By 1997 it was back in balance.

Does this need to happen again? It depends what your view is on what size of current-account deficit is sustainable. The Treasury, in its autumn prebudget report, predicted that the deficit would stabilise at about 2.75% of GDP and seemed comfortable with that. Others will think that 2.75%, more than £40 billion a year (the Treasury’s analysis came ahead of those awful third-quarter numbers), is too big for comfort.

The Treasury thinks that Britain will continue to attract significant capital inflows from abroad. If they dry up, the adjustment might have to be very painful.

PS: Gordon Brown and Alistair Darling are becoming a familiar double act at the prime minister’s monthly press conferences, which some have interpreted as a sign that the economy is really in trouble. For me the bigger concern is the message rather than the medium.

Last week prime minister and chancellor both came close to openly calling on the Bank of England to cut interest rates, which was picked up in the markets. Had the Bank cut, and it was under intense pressure to do so, it would have been interpreted as a clear “political” move and, in some quarters, one intended to keep Mervyn King, the governor, in his job.

That is daft, and shows how politicians have to be wary about saying anything about interest rates. They also have to think about some of their other messages.

In calling on public-sector workers to accept tight three-year pay deals, both Brown and Darling appealed to their sense of the greater good. By accepting such deals, they said, workers would help to keep inflation and interest rates low for everybody.

Three-year deals, it so happens, are a good thing, but why not tell it like it is? If the government means what it says about holding public spending growth to 2% a year for the next three years, half its recent rate, then there will be only one consequence of higher public-sector pay: fewer public-sector jobs. Perhaps prime minister and chancellor are not confident of their ability to hold the line.

Talking of mixed messages, there was one in the annual forecasting league table a couple of weeks ago. The figures for Lombard Street Research, taken from the Treasury’s monthly compilation of independent forecasts, were wrong, the result of a glitch somewhere between Lombard Street and the Treasury, so the firm did better than its position suggested.

david.smith@sunday-times.co.uk

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