The City was today at loggerheads with Alistair Darling after he refused to downgrade his bullish forecasts for economic growth.

The Chancellor insists predictions made in the March Budget of 1.75 per cent to 2.25 per cent growth this year and 2.25 per cent to 2.75 per cent next year are "realistic".

Sharing the stage with US Treasury Secretary Hank Paulson, he said: "We set out our forecasts in the Budget and Pre-Budget Report, and that remains the position."

It sparked yet another backlash from the City where economists and business leaders rubbished his figures - particularly for 2009.

"Is he doing a stand-up comedy act?" asked one, who did not want to be named for fear of reprisals. "It is beginning to look that way."

It marks a further deterioration of the Chancellor's reputation in the City following the collapse of Northern Rock and his hugely unpopular changes to the tax system, including a levy on nondomiciled residents, the abolition of taper relief on capital gains tax, and the fiasco over the 10p threshold.

A host of banks and other financial institutions are slashing their growth forecasts as wave after wave of dismal news batters the economy. Many warn recession is a real possibility - the first under New Labour - and to make matters worse, inflation is soaring.

Recession and a return of stagflation would be a disaster for Darling and Gordon Brown. It would also plunge the already creaking public finances into disarray as tax receipts fall.

Darling was unmoved, however, with the Treasury boasting of its "excellent forecasting record" since New Labour came to power in 1997.

"If you look at the range that we set out, the growth for this coming year and thereafter, I believe that what we have done is realistic," he said.

But "realistic" is not how the City sees it. Anything but, in fact. "These forecasts are completely unrealisic," is the verdict of Global Insight's Howard Archer.

Darling was warned at the time of the March Budget that he was way off and now he is feeling the pressure.

Lehman Brothers today cut its growth forecasts for this year from 1.4 per cent to 1.1 per cent and for next year from 1.1 per cent to just 0.3 per cent.

"A recession is more likely than not," says Lehman's Peter Newland. "We think there will be two negative quarters in the third quarter and fourth quarter, and another in the first quarter next year before a recovery. The Chancellor's predictions always looked pretty optimistic."

Even Bank of England Governor Mervyn King believes recession is "quite possible", and the International Monetary Fund has cut its forecast for this year and next to 1.6 per cent.

Professor Peter Spencer, chief economic adviser to the Ernst & Young Item Club, says next year will be far worse than this year, particularly if oil prices continue to rise at the current rate. Of the Chancellor's growth forecasts, he is scathing. "The chances are as close to zero as you can get," he says.

After years of growth, the economy is buckling under the strain of rising oil prices, runaway inflation and growing unemployment, as well as a falling housing market. Banks do not want to lend money, so consumers and businesses have less to spend. The pain is being felt everywhere, from the High Street to the City to the corridors of power in Westminster.

MANY view the Chancellor's refusal to budge as a political decision. Lower growth would mean lower tax receipts and leave Government coffers empty. And as Darling and Gordon Brown know, a lack of funds means lower spending, more borrowing or higher taxes - options both with be loath to take in the run up to a general election, likely in 2010.

George Buckley of Deutsche Bank says: "I'm not sure how much of this is standing by his numbers and how much is waiting for the Budget. If he cuts his growth forecasts now the next question would be 'what does this mean for the public finances?'"

Serious problems, says Simon Hayes of Barclays Capital. The Treasury has already compromised its borrowing targets with its £2.7 billion handout following the 10p tax debacle and the slowing economy is making matters worse.

Revenues for stamp duty are falling because fewer houses are being bought, and VAT receipts are in decline because food, which is free of VAT, is taking up a larger share of spending.

If the unions are successful in getting more pay for public sector workers, the Government's wage bill will also expand. Set against this is the rising oil price which will boost its revenues from North Sea taxes and duty at the petrol pump.

Even so, Hayes reckons borrowing will be £5 billion more than the £43 billion planned this year and £8 billion more than the £38 billion planned next. On that basis, there is a very good chance debt will breach the 40% of GDP ceiling, breaking one of the Government's key fiscal rules.

"At the time of the Budget, we were already of the view that the Treasury's macroeconomic forecasts were excessively optimistic, and developments since March have reinforced that view," he said. "The outlook for the public finances has deteriorated since March and the growth forecast for 2009 looks increasingly untenable."

This is all bad news for the Chancellor and the Prime Minister. For more than a decade, Brown has taken credit for low inflation and quarter upon quarter of economic growth. Having made his name while the sun was shining, Brown will be left to shoulder the blame during the storm. Darling is also in the firing line.