In short, if our luck runs out we'll slow to the point of recession. If we do reach that point, my bet is the recession will be a severe one.

If I'm anywhere near right, concerns about inflation will soon evaporate, as will the financial markets' expectations of more interest rate rises to come.

The evidence that the economy is already slowing quite sharply is now strong. Retail turnover has shown negligible growth in the first four months of this year.

In trend terms, approvals for the construction of new private dwellings have fallen each month since November. Similarly, the number of loans approved for owner-occupied homes has fallen each month since November.

In the three months to April, the level of business credit grew at an annualised rate of 5 per cent, compared with 25 per cent in the three months to December. National Australia Bank's index of business confidence has been falling for six months, though it recovered a little in May.

I don't normally take much notice of the Westpac-Melbourne Institute index of consumer sentiment - it usually shows short-lived "sticker shock" in response the latest rate rise, but not much else - but it's been falling for months and is now at its lowest level since the post-recession days of 1992.

The slowdown was confirmed by the national accounts for the March quarter, which showed growth in real gross domestic product at an annualised rate of 2.4 per cent.

We can't make much of the 20,000 fall in employment in May - one month can't be called a trend - but falls in the number of job ads suggest rising unemployment isn't far off.

So there's not much room for doubt that the economy's slowing and slowing sharply. But who's to say it won't speed up again in the second half of this year under the influence of the big tax cuts and the huge jump in coal and iron ore prices?

That possibility seems to be concerning the Reserve Bank governor, Glenn Stevens, but I doubt it will happen.

Why not? Because I'm a believer in the ketchup theory of monetary policy. When central banks gradually tighten policy by raising the official interest rate, the dampening effect on demand isn't linear.

For a long time it looks like what you're doing is having no effect - and then one day the dam bursts. You shake and shake the ketchup bottle, none'll come and then a lot'll.

Why does it work like that? Because when you're battling to cool a boom, you're fighting what's politely called "business and consumer confidence", but which Keynes much more revealingly referred to as animal spirits.

And with animal spirits, they're either up or they're down, they're on or they're off. I've seen enough signs in the indicators to convince me the public has switched from go to whoa.

If so, the wariness and caution is more likely to be self-fulfilling than to soon wear off. And a lot of people are so heavily indebted they've got a lot to be cautious about.

What happens to the tax cut? Many people save it - that is, they use it to reduce their debts.

We've been through a protracted period in which many people have been borrowing heavily for housing or consumption. It was always going to be only a matter of time before the pendulum started swinging back.

My guess is that time has arrived, brought on by worries about interest rates, petrol prices, the end of steadily rising house prices and the generally more anxious chat in the media.

So people are pulling in their belts, "repairing their balance sheets" or, in the latest jargon, "deleveraging". They're battening down the hatches in self-fulfilling preparation for stormier times ahead.

As we saw with our highly geared corporate sector in the late 1980s, the trouble with downturns that are preceded by the building up of debt is that they take a lot longer to turn themselves around.

Economic life doesn't return to normal until a lot of the debt has been repaid, but repaying debt during a period of compounding weakness - where overtime disappears, pay rises become sparse and some people suffer periods of unemployment - takes a long time.

Of course, I may prove quite wrong in my forebodings. We'll see.

Ross Gittins is the Sydney Morning Herald's Economics Editor.