George Osborne sees 'most dangerous time for global economy since 2008'

Mr Osborne said the greatest difference between the UK and its European neighbours was that "the market for our government bonds has benefited from the global flight to safety".

Yesterday the Bank of England lowered its forecast for from 1.8 per cent to 1.5 per cent for 2011, and from 2.5 per cent to 2 per cent.

Mr Osborne told MPs the country needs to be "realistic" and "set our expectations accordingly" for a long and arduous process of economic recovery.

He said: "History teaches us that recovery from this sort of debt-driven, financial balance-sheet recession was always going to be choppy and difficult.

"But the whole world now realises that the huge overhand of debt means that the recovery will take longer and be harder than had been hoped."

However, he warned the country is not immune to the debt struggles affecting Europe and the US, referring to this week's turbulent trading that saw stockmarkets slide dramatically.

The Dow Jones index plummeted by more than 14 per cent this week and the French market tumbled even further seeing a 23 per cent drop, the FTSE 100 is down by 16 per cent over the past month and British bank shares have been hit hard.

However, the chancellor offered reasons for optimism. He said: "The market for our government bonds has benefited from the global flight to safety. UK gilt yields have come down to around 2.5 per cent; the lowest interest rates in over 100 years; and earlier this week the UK’s credit default swap spread, or the price of insuring against a sovereign default, was lower than Germany’s."

He continued: "The very same rating agency that downgraded the United States has taken Britain off the negative watch that we inherited and reaffirmed our AAA status. This market credibility is not some abstract concept – it saves jobs and keeps families in their homes."

The Chancellor said Britain needs to remain committed to the policies of fiscal consolidation and debt reduction which "have made Britain that safe haven in the sovereign debt storm".