The City is leading the downturn

A slump in tourism - related primarily to worries over food safety following the foot-and-mouth disease outbreak - has also had a disproportionate effect on the capital.

The CEBR was still tentatively optimistic that these factors may prove only temporary.

"At this stage we still think that a slowdown is more likely than a full-blown recession," said Kevin McCauley, who prepared the report.

Policy challenge

But news of a slowdown of any kind will still trouble policy-makers in the city, which has enjoyed a spectacular economic boom over the past five years.

The government is increasingly concerned that London's infrastructure has not kept pace with growth in its economy.

Property prices in London are twice the national average, the cost of living is among the highest in the world, and the transportation network is notoriously inefficient.

This has led to extraordinary difficulties in attracting low-paid but crucial workers such as teachers, police officers and medical staff.

London's population has grown sharply over the past few years, swollen by a strong influx from the rest of the UK and overseas.

But high prices, and the migration of a few key employers, could already be reversing the trend.

Capital losses

The Office for National Statistics recently reported that London recorded a net population fall of 70,000 people in the year to June 2000, the highest net outflow on record.

In all, almost one-quarter of a million people moved out of London last year.

A broad economic slowdown, led by a slump among high earners, should help cool the housing market, making the city more affordable.

But it will also knock sentiment, and could lead to a debt crunch among Londoners with hefty mortgages.