Inflation has been remarkably steady at 2.7% or 2.8% in recent months so the drop in April to 2.4% was a surprise, and a very welcome one. Lower petrol prices and air fares contributed most to the fall, which reduced inflation to its lowest since September.

As Sir Mervyn King prepares to hang up his governor's boots, inflation is now agonisingly close to target. It may head up a bit in the short-term, but not by enough to force Mark Carney, his successor, to have to write a public letter of explanation to the chancellor.

Other measures of consumer inflation also dropped. The new CPIH measure, including owner-occupiers' housing costs, had inflation down from 2.6% to 2.2%. RPI inflation fell from 3.3% to 2.9%, while RPIJ (don't ask) came down from 2.7% to 2.3%. More here.

There was also good news on so-called pipeline inflation pressures. Output prices rose by only 1.1% in the 12 months to April, down from 1.9% in March, while core output price inflation dropped from 1.3% to 0.8%. Input prices, fell by 0.1% over the 12 months to April - in March they were up 0.8%. More here.

The only price strength, interestingly, was in house prices, up 2.7% in the 12 months to March, from 1.9% in February, as detailed here.

Today was unusual in two respects. The first was that it was Sir Mervyn King's last inflation report press conference, after more than 80, ahead of his retirement next month. The second was that the Bank's new forecast is slightly more upbeat than the one issued three months ago, which according to him is the first time this has happened since before the global financial crisis.

There is lots of good detail in the report. So, for example, the Bank expects a 0.5% rise in GDP in the second quarter, a steady recovery in consumer spending, a pick-up in business investment, a small increase in employment over the coming year and an increase in mortgage approvals. These and other assumptions/expectations are set out in a new feature of today's report, intended to show greater transparency, on p.42.

King said the biggest risks to the UK economy were external, particularly the eurozone, where today's Q1 GDP figures were mixed but overall on the weak side. However, the big picture, according to the report, is that: "Taking those risks into account, the [Monetary Policy] Committee’s best collective judgement is that the economy is likely to see a modest and sustained recovery over the next three years."

Inflation will come down gradually to the 2% target, but will remain above it for most of the next two years. It needs to, given that pay growth in the year to the first quarter was just 0.4%. The Bank noted that the markets do not expect a rate hike until 2016. The inflation report is here.

How do we square the Bank's cautious optimism with the latest labour market numbers, which as well as weak pay growth showed a rise in unemployment and a fall in employment? The short answer is that, while these figures were not strong, they were not particularly weak either.

Unemployment rose by 15,000 in January-March to 2.52m (a lower level than reported a month ago for December-February). The unemployment rate was 7.8%. Employment fell by 43,000 to 29.71m, though this appears to reflect particular weakness at the start of the quarter. The claimant count fell by 7,300 to 1.52m. The big picture is that the really strong rise in employment has abated, but that the job market has not gone into reverse. More here.

Britain's overall trade deficit narrowed to £3.1 billion in March, from £3.4 billion in February (originally reported at £3.6 billion). The value of exports increased by 3.5% between February and March, while imports rose by 2.6%. Britain's EU trade deficit widened to £5.6 billion from £5 billion, while the non-EU deficit narrowed from £4.2 billion to £3.5 billion.

The performance of non-EU trade, discussed by me last Sunday, is particularly interesting. The volume of non-EU exports has risen by 36% since 2009, the trough of the recession, while the volume of exports to the EU is up by 5%. But there is a long way to go. The trend in the trade deficit is flat. More here.

The Bank of England left monetary policy unchanged at its May meeting, as expected, Bank rate remaining at 0.5% and the size of the asset purchase programme at £375 billion. No statement was issued, though the Bank will publish its quarterly inflation report on Wednesday May 15.

Assuming Sir Mervyn King continued to vote for more quantitative easing, he appears to have been outvoted again, which may also be the case next month, his final monetary policy committee meeting as governor.

The majority on the committee looks to have been persuaded to stay its hand by two factors. Members are waiting on the success of the Funding for Lending scheme, and recent economic data has been stronger than expected, including the 0.3% rise in first quarter gross domestic product.

Industrial production figures today showed a 0.7% rise in overall industrial production in March, and a welcome 1.1% bounce in manufacturing. The 0.2% first quarter rise in industrial production was consistent with the GDP figure. More here.

The service sector purchasing managers' index completed a trio of better than expected surveys, and suggested the economy had some momentum going into the second quarter after the 0.3% first quarter rise in gross domestic product (which was also better than expected).

The service sector PMI rose to an eight-month high of 52.9 in April, from 52.4 in March. According to Markit, which complies the data: "The steady improvement in UK service sector performance seen since the start of the year was maintained in April. Growth of business activity was solid and the sharpest for eight months, supported by the strongest rise in new work since last May. A modest increase in staffing levels was also recorded as capacity showed signs of coming under pressure."

The services PMI supports the message of the first quarter, which was that it is the sector driving the recovery. Both the construction and manufacturing PMIs also rose but remained below the 50 expansion-contraction divide. But the strength of services probably rules out an extension of quantitative easing when the Bank of England's monetary policy committee meets next week.

This is Markit's summary of the three PMIs: "The upturn is being led by the service sector, but it has been accompanied by signs of activity stabilising in manufacturing and construction in April. The weighted PMI from the three surveys rose from 51.0 in March to 52.1, its highest since last August and signalling an increase in business activity for the fourth month running. The data suggest that the return to growth enjoyed by the economy in the first quarter persisted and may have gained momentum at the start of the second quarter." The release is here.

A strong performance from the service sector - partly offset by continued weakness in construction - meant gross domestic product grew by 0.3% in the first quarter of 2013, which was better than the 0.1% consensus. The risk was always there that the Office for National Statistics would have surprised us with a really bad number.

That 0.3% rise was made up of a 0.6% increase in services, a 0.2% rise in production (helped by a bounce-back in North Sea output) and a 2.5% drop in construction. Service sector output is now above pre-crisis levels, while manufacturing and construction remain well down.

Cold weather had no overall impact on the numbers, according to the ONS, weaker retail activity in January and March being offset by higher consumption of electricity and gas as we shivered.

The 0.3% rise makes the arithmetic for 2013 growth look interesting, following recent downward revisions to forecasts. If GDP stays at its Q1 level, the economy will have grown by 0.5% (2013 over 2012). Even modest GDP rises over the remaining quarters will give higher growth. And now, the triple-dip having been avoided, the next point of interest will be if and when the ONS revises away the double-dip. It has already gone from the data on the expenditure measure of GDP. More here on today's data.

Nobody would describe the latest figures for the public finances as good but the fact that for 2012-13 public sector net borrowing scraped in at £120.6 billion (after many adjustments), just below 2011-12's outturn of £120.9 billion, was better than it might have been.

Even relatively recently it looked likely that borrowing in 2012-13 would be up by £10-15 billion on 2011-12. The fact that it is down shows what can be achieved when the chancellor, chief secretary and Treasury officials put their minds to achieving something, moving heaven and to earth to ensure a borrowing reduction. A similar effort directed to getting borowing down more significantly would not go amiss.

These numbers will be revised over time. The current outturn for 2011-12 has jumped about a lot. The big picture is that deficit reduction has stalled for now. The underlying public sector current budget deficit, £98.5 billion in 2012-13, was up on £92.2 billion in 2011-12.

There's evidence, however, of some stabilisation in the numbers. Total receipts and current expenditure were both up by 1.8% in 2012-13. Of course receipts, being smaller, need to rise faster than expenditure. But this is better than it was. More here.

Meanwhile the Treasury has published its latest analysis on Scottish independence, relating to currency arrangements, and George Osborne has gone up to Scotland to present it. It is interesting, and has already sparked a debate.

For Scots, the big question is whether you agree with this: "The UK is one of the most successful monetary, fiscal and political unions in history. It is a union that has brought economic benefits to all parts of the UK because taxation, spending, monetary policy and financial stability policy are co-ordinated across the whole UK. This has helped us weather the recent global economic crisis because governments that are able to borrow in their own currency, and make their own political and economic decisions, are able to borrow more cheaply. And with clear political accountability, a government can quickly respond to a financial crisis."

It sets out the options for an independent Scotland:

"An independent Scottish state would have four main currency options. It could:
• continue to use sterling with a formal agreement with the continuing UK (a sterling currency union);

• use sterling unilaterally, with no formal agreement with the continuing UK
(“sterlingisation”);

• join the euro; or

• introduce a new Scottish currency."

"Each of these options would affect transaction costs, fiscal and monetary policy and financial stability in an independent Scottish state. All options would involve the establishment of new independent monetary institutions. New frameworks for fiscal and financial stability would also be necessary."

The implicit warning is that this would be a leap in the dark for Scotland: "The current currency and monetary policy arrangements within the UK serve Scotland well. A move away from the current arrangements would require a set of decisions that would affect the wider management of the economy – not only the currency but also the setting of monetary and fiscal policy. The status quo would not be one of the options. The analysis in this paper concludes that all of the alternative currency arrangements would be likely to be less economically suitable for both Scotland and the rest of the UK." The report is here.

This was a weaker set of labour market statistics, in three important respects. The growth in employment stabilised, slipping by a modest 2,000 in the latest three months. Unemployment rose, by 70,000 over the latest three months to 2.56 million. Pay growth was extremely weak, with total pay up 1% (the lowest since records began in 2001) and total pay, including bonuses, up by just 0.8%.

The jump in unemployment appears to have been due to big monthly rise in January, but will remain in the figures for a couple more months, after which unemployment could stabilise or fall.

Better news in the figures included the lowest inactivity rate for 16-64 year-olds (22.2%) since 1991 and a fifth successive monthly fall in the claimant count. It dropped by 7,000 in March to 1.53 million. But overall, weaker numbers. More here.

Meanwhile, the Bank of England's monetary policy was split again on quantitative easing, with three members (Sir Mervyn King, David Miles and Paul Fisher) again voting for an increase from £375 billion to £400 billion but the rest happy to stay put. The majority may yet be persuaded, though at present they see the best route to stronger growth through improving the working of credit markets. More here.

Consumer price inflation held steady at 2.8% in March, continuing a remarkable period of stability, albeit one above the 2% target. The latest 2.8% rate was the same as in February, and for four months before that it was 2.7%. Sir Mervyn King will hope this persists, sparing him the duty of writing a letter to the chancellor before he steps down at the end of June. Such a letter would have to be written if inflation goes back above 3%.

Some analysts think this will happen, largely because of base effects - the consumer prices index was relatively flat a year ago, right through to the summer - though lower petrol prices will help this time. They helped a little in March.

The Office for National Statistics now produces an array of inflation measures. CPIH, including owner-occupiers', also held steady, but at 2.6%. RPI inflation edged up from 3.2% to 3.3%, while the new RPIJ measure (don't ask) rose from 2.6% to 2.7%. More here.

If you're looking for good news, it may be in the producer price index, published at the same time. Output price inflation in March edged down from 2.3% to 2%, with core output price inflation at just 1.3%. Input price inflation was a modest 0.4%, down from 2.1% in February. More here.

The February induistrial production figures, showing a rise of 1% in overall production and 0.8% in manufacturing, show that this part of the economy is not dead yet, and may not be the drag on Q1 GDP that was feared. Specifically, overall industrial production showed a rise of 0.3% in the latest three months compared with the previous three, while manufacturing was down by a modest 0.2%. The figures are consistent with a small rise in Q1 GDP. More here.

The trade figures were, however, disappointing, showing a widening of the trade deficit in goods and services from £2.5 billion in January to £3.6 billion in February, as exports fell and imports rose. There isn't, however, much of a trend evident in the numbers. Exports continue to disappoint, however. EU exports are down by 5.2% on a year ago but non-EU exports are up by only 0.6%. More here.

Though the manufacturing and construction purchasing managers' indices edged up in March, only the service-sector PMI is in expansionary territory (above 50). It rose from 51.8 to 52.4 in March. Though this is no guarantee that overall GDP will rise in the first quarter, it is mildly encouraging.

The deatils were also encouraging, specifically:

"Business activity in the UK service sector continued to increase during March. Growth was solid and the strongest since last August as incoming new work also rose at an accelerated rate. Payroll numbers increased, albeit at a fractional pace, while confidence in the outlook improved to the highest for ten months.

"The headline seasonally adjusted Business Activity Index registered 52.4 in March. That was up from February’s 51.8 and the best reading for seven survey periods. Solid growth was achieved despite a number of reports that poor weather had weighed on activity.

"Increased service sector output was supported by a marked rise in new business. Latest data showed growth was the steepest since May 2012, with companies commenting on an underlying strengthening of market demand."

This is the verdict of Chris Williamson of Markit: "With growth of the service sector offsetting contractions in manufacturing and construction, the PMI survey data collectively point to the economy having grown by a mere 0.1% in the first three months of the year. This is clearly a far from satisfactory pace of growth, although it is likely that the poor weather caused disruptions to many businesses in recent months, meaning the underlying recovery trend is likely to be stronger than the recent data suggest."

Forward-looking indicators point to a stronger growth picture in the second quarter, Markit added.

Today's second revision to gross domestic product in the final quarter of 2012 left the quarterly change unchanged at a fall of 0.3%. Consumer spending was revised up, to show an increase of 0.4%, from 0.2%, but overall investment fell by 0.2% and the deficit on net trade rose to £6 billion, from £5.3 billion in the third quarter.

As always, there is interest in the revisions. Most people are aware that GDP figures get revised over time, though there are always one or two "revision deniers" around. The latest revisions show that the double-dip recession at the end of 2011 and into 2012 is now close to being revised away. A year ago we had GDP falls of 0.3% in the final quarter of 2011 and 0.2% in the first quarter of 2012. Now they are each 0.1% and the small fall in the first quarter of 2012 is very close to being revised to zero - it already has been for GDP excluding North Sea oil and gas.

None of this changes the fact that growth is disappointing, or that the economy is failing to rebalance. The current account deficit widened alarmingly last year to £57.7 billion, from £20.2 billion in 2011. The fourth quarter deficit was £14 billion, 3.6% of GDP, slightly down from £15 billion in the third quarter.

The GDP figures are here, the balance of payments data here.

There are so many adjustments in the public borrowing figures these days that getting to the underlying picture is not easy. But on an underlying basis, the February borrowing numbers - inconveniently published on the day after the budget - look like good news.

Specifically, net borrowing in February was £2.8 billion, a huge £9 billion down on a year earlier. Some of this was due to special factors but stripping them out, borrowing was still £4 billion lower. Cumulative borrowing excluding the Royal Mail pension transfer and the shifting of asset purchase facility money from the Bank of England to the Treasury was £101.3 billion, compared with £104.2 billion in the corresponding period of 2011-12. Maybe talk of a borrowing undershoot is not so far-fetched. More here.

Also today, retail sales jumped by 2.1% in February, which was far stronger than expected, though volumes over the latest three months were still down by 0.2% on the previous three. More here.

There were so many measures unveiled by George Osborne today that it will take teams of accountants some weeks to go through them all. In the absence of that, it can be said that the chancellor was imaginative, listened and acted on pretty well every idea coming from his backbenches (and at least one from the opposition) and produced plenty to think about.

This was not the dull "holding" budget we had been led to expect. The raising of the personal allowance to £10,000 next year was not a big surprise, and neither was the freezing of fuel duty in September. Perhaps the 2015 cut in corporation tax to 20% wasn't either.

But the cut in beer duty was a good populist measure for a chancellor under political pressure, the Help to Buy scheme went further than most expected on housing, and the new employment allowance looks good. As a growth package this was less of a damp squib than Osborne's earlier efforts, suggested quite a lot of thought had gone into this budget and was so much better than the March 2012 budget you would not have thought the same team was responsible.

There were, of course, disappointments. Growth was revised down further than had been expected - 0.6% this year is half the December forecast - and deficit reduction has stalled.

As the Office for Budget Responsibility's new forecasts, here, show, deficit reduction has come to a halt. The figures for 2011-12, 2012-13 and 2013-14 are, on an underlying basis, £121bn, £120.9bn and £120bn. Borrowing could easily rise, this year and next. As it is, debt won't be falling as a percentage of GDP until 2017-18.

Easily the most confusing part of Osborne's speech was when he dealt with the Bank of England's remit. The inflation target stays at 2%, but the Bank is being encouraged to use forward guidance and other measures to boost the effectiveness of monetary policy. It will also be required to set out the growth-inflation trade-off in its decisions. Interesting, if potentially confusing. The budget document is here.

Though there was a small, 7,000, rise in the Labour Force Survey measure of unemployment in the November-January period, to 2.52 million, these were still strong numbers.

Employment rose by 131,000 in the latest three months and was up 590,000 on a year earlier. Full-time jobs rose by 195,000 in the latest three months (there was a 64,000 drop in part-time) and private sector jobs by 151,000 (there was a 20,000 drop in public sector employment). The claimant count fell in February.

Pay, however, continued weak, up just 1.2%. More here.

Inflation edged up from 2.7% to 2.8% last month, or rather it did on one measure, the consumer prices index. The 2.8% rate in February was the highest for nine months and pushed up by gas and electricity bills, petrol and diesel and air fares. It may go higher in the coming months.

On another measure, the new CPIH, consumer prices including housing (owner-occupiers) costs, inflation also edged up, from 2.5% to 2.6%. Keep an eye on CPIH - it may eventually evolve into a new target measure of inflation.

What about the retail prices index? The RPI is now so poorly regarded by the Office for National Statistics that it is no longer designated as an official statistic, though it will continue to be published. It actually edged down last month, from 3.3% to 3.2%.

The ONS prefers its new measure, RPIJ, using the Jevons method of calculation. It showed an inflation rate of 2.6% last month, from 2.7% in January. More here.

Suggestions that the Bank of England has gone soft on inflation, including mine, appear to have hit home. Sir Mervyn King's observation that sterling has fallen far enough - which has lifted the pound - can be seen in that light.

So, more explicitly, can the line taken by Spencer Dale, the Bank's chief economist, in this speech. Talking about the consensus that low inflation is beneficial for growth, he said:

"More recently, though, there have been some worrying signs that cracks may be appearing in that consensus. A sense that inflation is somehow yesterday’s war. That central banks should focus more on growth. That a period of higher inflation may even aid the recovery. This is dangerous talk.

"It sometimes feels like we’ve been here before. One of the mistakes made by policymakers in the late 1960s was to allow inflation to get out of control after nearly two decades of price stability. Intellectual ideas pop in and out of fashion. The inflation target and the MPC are the result of a long and painful search for a credible money anchor. They provide the memory to ensure that we don’t return to the inefficiency and inequity of the 70s and 80s. They provide the memory that underpins the consensus that low and stable inflation is a perquisite for economic prosperity. And they provide the memory that guards against some of the dangerous talk of late."

He goes on to say:

"The argument that it’s possible to grow the economy without much increase in inflation is, of course, seductive and enticing. It’s like being offered a free lunch. And yes, there are some grounds for thinking that the trade-off between growth and inflation may well be unusually favourable. But how strong those mechanisms actually are is far from clear. And it seems particularly optimistic to assume that the financial crisis and the near crippling of our banking system has played little role in the recent limp supply-side performance of our economy.

"Taken to its limit, the argument that monetary policy can be used to expand demand with little or no implications for inflation challenges the consensus that the best contribution that monetary policy can make to the long-term health and prosperity of the economy is to deliver price stability. That consensus is based on painful experience that monetary policy can’t affect the level of output in the long run. That we can’t generate permanently higher output and permanently higher employment simply by printing more money. We should be nervous about how quickly we overturn that consensus."

After notably weak purchasing managers surveys for manufacturing and construction, the service sector PMI showed a welcome (and unexpected) rise to 51.8 in February, from 51.5 in January. Though the read-across from the PMIs to gross domestic product is not always great, Markit, which produces the figures, said the PMIs were consistent with modest growth.

This is what Markit said about the service-sector PMI: "Business activity in the UK service sector increased for a second consecutive month in February. New business also increased, leading to a further expansion of payrolls. Confidence also continued to improve, with optimism regarding future activity at a nine-month high.

"The headline seasonally adjusted Business Activity Index posted 51.8 in February, slightly above January’s 51.5 and a five-month high. Modest growth of activity has now been signalled for two successive months. More than 23% of respondents recorded increased activity since January, with anecdotal evidence suggesting stronger client demand led to the development of new projects and larger client bases."

And this is what it said about the broader picture: "So far, the PMIs suggest that the economy will have grown by 0.1% in the first quarter, barely making up for any of the 0.3% decline seen in the final quarter of last year. However, growth could turn out stronger than this as there is good reason to believe that at least some of the weakness in manufacturing and construction was due to business being disrupted by bad weather, meaning a brighter picture may emerge in March."

Earlier, the British Retail Consortium said retail sales in February were their strongest for more than three years, with a 2.7% like-for-like increase in sales value compared with a year earlier, and a 4.5% rise in total sales.

Gross domestic product in the fourth quarter of last year was unrevised, with the fall of 0.3% initially reported left unchanged, even though the detail on manufacturing and construction was a little better, though services slightly worse.

Household spending rose by 0.2%, its fifth successive quarterly rise but gross fixed capital formation - investment - fell by 0.4%, after a 0.6% drop in the third quarter.

The good news was in past quarters. Growth in the third quarter was revised back up to 1%, while the contraction in the first quarter of 2012 has been revised down to 0.1%, as foreshadowed here. It will only take a small upward revision now for the "technical" recession, the double-dip, to be removed from the statistical record. More here.

Simon Ward of Henderson points out that the "onshore" double-dip has already been revised away. His note is here.

No normal column this week, as a result of holiday, but a comment on the ratings downgrade I did for the Sunday Times News section

Make no mistake, the loss of Britain’s Triple-A sovereign debt rating matters. It is symbolic, has implications for Britain’s future borrowing costs and is a judgment on the credibility of the government’s deficit reduction plan. It should also have put paid to the idea that George Osborne has room for big spending increases or tax cuts to stimulate growth.

The credit rating agencies have been around for more than a century, dominated by the big three of Moody’s (which downgraded Britain on Friday), Standard & Poor’s and Fitch. They came into existence to provide independent assessments of American railroads and other investment propositions for investors. But their prominence has grown in recent years, both because of their award of maximum Triple-A ratings for the dodgy “sub-prime” securities that dragged the world into the financial crisis, and because of their rating downgrades of “sovereign” debt, for countries in the Eurozone but also, 18 months ago, America.

Why does their judgment on countries matter if they got it so wrong before the financial crisis? The agencies argue that different methods and different staff are used to assess sovereign debt than financial securities. And, perhaps surprisingly, their role and importance has grown since the crisis. Ratings are used by financial regulators and by investors.

Do not the markets make their own minds up, and is not that the most important judgment? Markets do cast their verdicts on economies, and the weakness of the pound and the rise in the interest rates the government pays on its debt this year (though they remain at low levels) reflects that. But markets can turn on a sixpence, quickly casting of their worries about an economy. Rating downgrades take a lot longer to reverse and usually are never reversed. So, even though Friday’s downgrade reflected many of the concerns markets have been expressing, and though it was widely anticipated, it was still an important event. There is some comfort from the fact that America and France did not suffer in the aftermath of their downgrades, but it is small comfort.

Will the chancellor rip up his plans in response? No. The worry expressed by Moody’s is that the government has slowed the pace of deficit reduction too much. It is concerned that government debt will not be falling as a percentage of gross domestic product until the next parliament, after Osborne abandoned one of his fiscal rules last year. It is also worried that, while the current government will continue to seek to reduce the budget deficit, there is no guarantee that will be the case after the next election, when another government may be in charge.

With two more rating agencies yet to give their judgment, we may not yet have seen end of Britain’s downgrades. The challenge will be prevent the loss of Britain’s international status going down even more notches in future.

It was only a matter of time before the UK lost a Triple-A credit rating that has been held since Moody's first assigned it in 1978. The loss of the Triple-A by one of the three main rating agencies has been on the cards since America lost hers in August 2011 and was predicted by many (including me) for this year.

The trigger for the downgrade was George Osborne's December move, endorsed by the Bank of England the International Monetary Fund, to ditch his target for debt to be falling as a percentage of GDP by the end of the parliament. Moody's saw this as a softening of the commitment to fiscal consolidation.

The loss of the Triple-A would have been more serious in 2010, ahead of the US downgrade, and was a serious possibility had not the coalition, or a re-elected Labour government, beefed up the fiscal consolidation strategy. As it it, the best that can be said is that Osborne & Co delayed the downgrade. Their target now, like a relegated football team, is promotion back to Triple-A.

Does it matter? On its own, no. But the state of British politics in general, and Tory politics in particular, is pretty fractious. Coming alongside uncertainty about the Bank of England and monetary policy, and its wavering commitment to low inflation, which has weighed heavily on sterling, it is not good news.

It is a reminder that the UK needs genuine, supply-side led growth. And that UK policymakers need to get a grip. The Moody's statement is here.

The February inflation report was Sir Mervyn King's penultimate as governor, and it was also the 20th anniversary of the first such report, which he created as the Bank's chief economist. He used the comparison to strike an optimistic note:

"When I sat in front of you in 1993, unemployment had just reached its peak of 3 million. But, although we did not know it at the time, a recovery was underway. Twenty years later, after a financial crisis and deep recession, unemployment is again much too high, and output is still below its level 5 years ago. Yet there is cause for optimism. Today too, a recovery is in sight."

He made the good point that the bulk of the economy - manufacturing and services - has continued to grow, and indeed grew by 1.2% even on pre-revised figures, last year. He also offered hope of a gradual building of the recovery, which won't be normal, but: "Further out, a continued easing in domestic credit conditions – supported by the Bank’s asset purchase programme and the Funding for Lending Scheme – together with a stronger global backdrop, underpin a slow recovery in output."

King stressed the exceptional support monetary policy has provided for the economy, but also the limits about what it can do. As he put it: "Monetary policy works, at least in part, by providing incentives to households and businesses to bring forward spending from the future to the present. But that reduces spending plans tomorrow. And when tomorrow arrives, an even larger stimulus is required to bring forward yet more spending from the future. As time passes, larger and larger doses of stimulus are required." The same is true, of course, for short-term stimulus through fiscal policy.

Inflation is above the 2% target because of factors the Bank says are largely outside its control, including administered prices such as university tuition fees. That will "make the challenge of bringing inflation back to 2% more difficult". In the meantime, the Bank will continue to "look through" the inflation overshoot, as long as inflation expectations remain well-anchored, applying monetary policy flexibly.

We will hear a lot more about 'flexible' inflation targeting. The inflation report is here.

Consumer price inflation remained at 2.7% in January, which is a stability of sorts: CPI inflation has never before remained unchanged for four months in a row. RPI inflation, by contrast, is still moving around. The January rate of 3.3% was up from 3.1% in December. Indeed, you have to go back 18 months for a time when RPI inflation was stable for two months in a row.

There wasn't much bad news in these inflation numbers but there wasn't much good either. Every measure of inflation is stuck above 2%. The big change from the past is that goods prices are not offsetting service sector rises. In the latest numbers goods price inflation is 1.9%, service sector inflation 3.7%.

"Core" inflation, excluding energy, food and alcohol, did edge down from 2.4% to 2.3%, but with higher food and energy prices likely to put upward pressure on inflation in the coming months, that is small comfort. More here.

The Bank of England does not normally say anything when there is no change in policy. This time, perhaps influenced by the presence of its new governor Mark Carney in London, it has issued a long statement. Bank Rate stayed at 0.5% and quantitative easing at £375 billion (though £6.6 billion of maturing gilts will be reinvested).

But the Bank has provided a long statement, part of which says it is "appropriate to look through the temporary, albeit protracted, period of above-target inflation. Attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term". The statement is here.

Mark Carney, who will take over as Bank of England Governor on July 1, is giving evidence to the House of Commons Treasury committee. In the meantime, the Bank has published his written evidence, which is interesting.

Does he favour a change in the inflation target? He says the UK's (and Canada's) flexible inflation target has proved to be be "the most effective monetary policy framework implemented so far". He says the bar for change is very high but review and deb ate can be positive. His detailed evidence is here.

Carney's approach - so far - suggests he will be looking for consensus and will not be seeking to tear anything up too rapidly when he arrives at the Bank.

What kind of economy will he be presiding over? Manufacturing output rose by 1.6% in December, with overall industrial production up 1.1%. Though this did not change the GDP picture for the fourth quarter - down 0.3% - it left both above their fourth quarter average, by 0.8%-0.9% More here.

Meanwhile, the trade deficit narrowed from £3.6bn to £3.2bn in December.

The Institute for Fiscal Studies Green Budget is always a big event, and this year's is no exception. It underlines the scale of the fiscal challenge remaining, after George Osborne has allowed the automatic stabilisers to operate in the context of a weaker-than-exepcted economy - allowing "borrowing to take the strain".

Highlights from this year's Green Budget are:

On current plans public service spending in “unprotected” Whitehall departments - that's everything except health, education and overseas aid, could fall by a third between 2010–11 and 2017–18.

If departments continue with trajectories implied by current plans public sector employment will have fallen by 1.2 million by 2017–18. This is because the public sector is responding to the squeeze by cutting jobs rather than real pay.

George Osborne will be borrowing £64 billion more in 2014–15 than he planned just two years ago. This is because he is choosing not to offset the forecast deterioration of £65 billion driven by a worse economic outlook.

Social security spending is rising from 28.5% to 32.5% of all public spending between 2010-11 and 2017-18 - cuts to working-age benefits are offset by more generous payments to pensioners.

Taking all the tax and benefit changes introduced between the start of 2010 and 2015–16 the richest households will be hit hardest.

The big increase in the personal tax allowance, at a cost of £9 billion, is "remarkable" given the fiscal climate - but doesn't really take many out of tax because of National Insurance. There is a lack of a coherent tax policy. The IFS press release is here.

Tomorrow's industrial production figures will provide further information on how the economy ended 2012. Meanwhile, yesterday's service sector purchasing managers' index, which showed a jump back above 50 to 51.5 in January, suggested that, taking manufacturing, construction and services together, the economy expanded in January. This was Markit's assessment:

"Companies reported the strongest rise in services activity for four months, building on the promising news from manufacturers last week, where output was reported to have grown at the fastest rate for 16 months in January. Although construction remains a worry and continues to contract, the PMIs collectively point to the UK growing marginally again in January."

“Stronger growth would inevitably have been recorded had the country not suffered the heavy snowfall, suggesting the underlying trend is even stronger than these numbers indicate." Its release is here.

There are, of course, two points to make. January is only one of the first quarter's three months and the read-across from the PMIs to Office for National Statistics data is often not perfect.

George Osborne's speech on the banks, delivered at J.P. Morgan's offices in Bournemouth, is longer on rherotic than detail, but did contain two new things, strengthening the ring-fencing of high street and investment banking and allowing new entrants access to the payments system.

The question about policy on the banks, as before, is whether it helps or hinders the supply of credit into the economy. The jury is out but it is hard to see it helping. These are the two key points from Osborne:

"Today, we will go further than previously announced, enshrining in law these simple principles. I can announce that your high street bank will have different bosses from its investment bank. Your high street bank will manage its own risks, but not the risks of the investment bank.

"And the investment bank won’t be able to use your savings to fund their inherently risky investments. My message to the banks is clear: if a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether – full separation, not just a ring fence."

He goes on to use the phrase "electrify" the ring fence. The speech is here. This was his second point:

"Payments systems sit at the heart of the banking system. They are the hidden from view wirings that operate every time you get wages paid into your bank account, deposit a cheque or withdraw money from an ATM. It’s how the money flows around the system.

"And it’s a bit like the electricity grid, every person and every business needs to be plugged into them to enter the banking market. At the moment, a new player in the industry has to go to one of the existing big banks to use the payment system.

"Asking your rival to provide you with the essential services you need at a reasonable price is not a recipe for success. And it other walks of life, like telecoms, we don’t operate like that. There are no incentives on the big banks to deliver new and better services for users – like saving the cheque or creating new services like mobile payments.

"Why, in the age of instant communication, do small businesses have to wait for several days before they get their money from a credit or debit card payment? It should be much quicker. Why do cheques take six days to clear?

"Customers and businesses should be able to move their money round the system much more quickly. Why is it that big banks can move their money around instantly, but when a small business wants to make a payment it takes days? The system isn’t working for customers, so we will change it.

"I can announce today that the Government will bring forward detailed proposals to open up the payment systems. We will make sure that new players in the market can access these systems in a fair and transparent way.

"The last Government let the established players off the hook by failing to implement the conclusions of the review they themselves commissioned, and allowing the big existing banks to regulate themselves. This Government will make sure payment systems serve the needs of consumers, not the needs of the established banks."

Manufacturing has started the year promisingly in both the UK and the eurozone. In Britain the headline manufacturing purchasing managers' index slipped from 51.2 in December to 50.8 in January but the production component was at a 16-month high. More details here.

In the eurozone, the level of the PMI is lower at 47.9, but this was a big improvement on December's 46.1 and represented an 11-month high. More here.

Given the information we had on industrial production in October and November, there has to be some relief that the quarterly fall in gross domestic product (GDP) was not even larger. As it was GDP fell by 0.3%, while industrial production dropped by a hefty 1.8%.

Construction industry output rose modestly, by 0.3%, for the first time in a long while, in spite of an assumption by the Office for National Statistics that there was a non-seasonally adjusted slump in the sector's output of 16% in December. Service sector output was flat.

The big picture is that these preliminary figures show that the economy showed no growth in 2012 (actually marginally better than the Office for Budget Responsibility's December estimate of a 0.1% fall) and was broadly flat in the fourth quarter compared with a year earlier.

Those employment figures, showing a 552,000 rise over the past 12 months, look even harder to explain in the context of zero growth.

Taking out North Sea oil from the picture doesn't help much either. Though this reduces the Q4 fall to 0.1%, it still leaves 2012 growth at a modest 0.2%, and growth in the fourth quarter compared with a year earlier at 0.4%. The question is whether the third and fourth quarters should be taken together to show modest quarterly growth or, as justified, whether GDP genuinely is as flat as these figures suggest. More here.

Would the government be getting more or less flak if the GDP figures were OK but the employment/unemployment figures were not? We will never know, though people will always tend to gravitate towards bad news.

As it is, the news on jobs continues to be very good. Comparing September-November 2012 with June-August there was a rise of 90,000 in employment, to 29.68 million, and a 37,000 drop in unemployment to 2.49 million, or 7.7% of the workforce.

The claimant count in December 2012 was 1.56 million, 4.8% of the workforce, down 12,100 from November and 40,500 lower than a year earlier.

The composition of the latest rise in employment was also good, with a rise of 113,000 in full-time employment and a drop of 23,000 in part-time employment. Compared with a year earlier, employment was up by an astonishing 552,000, while unemployment was down by 185,000.

Was there any bad news in this release, available here? Total pay in the lates three months was up by only 1.5% on a year earlier, while pay excluding bonuses was up by only 1.4%. People are pricing themselves into jobs but real earnings continue to fall.

In his speech in Northern Ireland this evening, Sir Mervyn King has set the cat among the pigeons with this: "It would be sensible to review the arrangements for setting monetary policy."

Was he arguing for dropping the 2% inflation target? No, but he was arguing that it should be interpreted flexibly. He went on to say:

"Our current remit does not specify how the MPC should strike a balance between growth and inflation in the short run. The horizon over which inflation should come back to target is effectively delegated to the MPC.

"But should the MPC itself choose how quickly to bring inflation back to target, or should the government use its annual remit to set that horizon? Is there a gain from trying to quantify how the MPC should manage the trade-off between growth and inflation in the short run? The recent guidance by the Federal Reserve about the conditions under which it would continue to hold interest rates at close to zero is a way of quantifying the “flexibility” in flexible inflation targeting. It describes how the Federal Reserve will interpret its freedom to balance its twin objectives for employment and inflation. How much discretion to give to the MPC and how much should remain with the Chancellor is an interesting question that was raised, but not fully resolved, in 1997 with the system of open letters which gives the Chancellor the opportunity to comment on the horizon over which the MPC plans to bring inflation back to target. So there are certainly aspects of the inflation targeting regime to consider."

But then he said: "To drop the objective of low inflation would be to forget a lesson from our post-war history. In the 1960s, Britain stood out from much of the rest of the industrialised world in trying to target an unrealistic growth rate for the economy as a whole, while pretending that its pursuit was consistent with stable inflation. The painful experience of the 1970s showed that this illusion on the part of policy-makers came at a terrible price for working men and women in this country. The battle to bring inflation expectations down was long and hard, and involved persistently high levels of unemployment. Wishful thinking can be indulged if the costs fall on the dreamers; when the costs fall on others, it is unacceptable. So a long-run target of 2% inflation should be an essential part of our macroeconomic framework."

So keep the inflation target but allow policymakers flexibility. The speech is here.

Today's public finance figures were marginally disappointing, with £15.4 billion of net borrowing in December compared with £14.8 billion a year earlier. The current budget deficit was £13 billion, up from £12.5 billion in December 2011.

The cumulative figures were helped by revisions to earlier data, though there's still an overshoot compared with 2011-12. The current budget deficit, for example, is running at £95.2 billion in the April-December period, up from £85 billion in the corresponding period of 2011-12. Adjusted public sector net borrowing was £108.8 billion, £9.5 billion up on 2011-12.

Though the gap is narrowing, it appears borrowing is heading for an overshoot, which will be an embarrassment for George Osborne and the Office for Budget Responsibility. The ONS release is here.

Today's release was notable for the fact that public sector net debt rose to £1,111.4 billion, 70.7% of gross domestic product. It thus rose above 70% of GDP, from 69.3% in November.

Retail sales slipped by 0.1% in volume terms in December, according to the Office for National Statistics, while excluding automotive fuel they dropped by a slightly larger 0.3%. Year-on-year the two measures showed rises of 0.3% and 1.1% respectively.

These were disappointing figures, confirming the absence of a meaningful consumer recovery as above-target inflation squeezes real incomes. The ONS says that the 12-month rise in overall sales volume was the weakest for a December since 1998 if you exclude snow-affected December 2010.

Many will see this as predictable in the light of the recent spate of high-profile high street closures, though there continue to be areas of considerable strength. John Lewis department store sales in the week to January 12 were up by 18.7% on a year earlier, for example.

But an across-the-board recovery in retail sales requires improved consumer confidence and real-income growth. The release is here.

Consumer price inflation came in at 2.7% in December, the same as in November and October. Though this shows a very sticky inflation rate, there was some relief that it was not a bit higher. RPI inflation edged up from 3% to 3.1%. For those who are interested, the new RPIJ inflation measure, were it published, would also have shown inflation edging up, from 2.1% to 2.2%.

There isn't an enormous amount of inflationary pressure in the economy - producer output price inflation in the 12 months to December was just 2.2%, while input price inflation was a mere 0.3% - but a return to the 2% inflation target seems as remote as ever. If it isn't the threat of higher food prices, administered prices or university tuition fees, or other factors, can be relied on to keep inflation high.

Should we expect anything better? The December figures completed a year in which the average CPI inflation rate was 2.8%. The average rate for the past eight calendar years (2005 to 2012) was 2.9%. Only for a relative brief period in recent years (1997-2004) has CPI inflation been consistently below the 2% target. More on today's numbers here.

Industrial production in Britain is weak, down 2.4% in November compared with a year earlier, with manufacturing down 2.1%. The details are here. The question is whether it is weak enough to produce a negative reading for gross domestic product in the fourth quarter.

In November alone, industrial production rose by 0.3% month on month, thanks to a recovery in North Sea oil and gas output but manufacturing was down by 0.3% and domestic energy supply by 4.1%. This leaves the arithmetic for industrial production in the fourth quarter looking very tricky.

Taking October and November together, industrial production is a huge 2.3% down on the third quarter average. It would take an implausibly large rise in December for industrial production, 15.6% of GDP, not to be a drag on GDP.

There is slightly better news for construction, which may make a small contribution to growth in the fourth quarter. Though output fell by 3.4% in November, according to figures also released today, a strong rise in October means the two months together are 4.2% above the third quarter average on a non-seasonally adjusted basis. More on that here.

Even so, the onus will be on services to prevent a fourth quarter GDP fall. Here, we're more or less in the dark. The only hard number we have is for October, which was very similar to the third quarter average. We won't know more until January 25, when the GDP first estimate is released.

The Office for National Statistics, in the person of the official statistician Jil Matheson, has come up with a curious compromise following a consultation on the RPI.

This is the ONS's summary, available here:

"Following a consultation on options for improving the Retail Prices Index (RPI), the National Statistician, Jil Matheson, has concluded that the formula used to produce the RPI does not meet international standards and recommended that a new index be published.

"The National Statistician’s consultation was prompted by the need to address the gap between the estimates produced by the RPI and the Consumer Prices Index (CPI). The ONS research programme found that use of the arithmetic formulation (known as the ‘Carli’ index formula) in the RPI is the primary source of the formula effect difference between the RPI and the CPI, and that this formulation does not meet current international standards. Therefore, a new RPI-based index will be published from March 2013 using a geometric formulation (Jevons), known as RPIJ.

"In developing her recommendations the National Statistician also noted that there is significant value to users in maintaining the continuity of the existing RPI’s long time series without major change, so that it may continue to be used for long-term indexation and for index-linked gilts and bonds in accordance with user expectations.

"Therefore, while the arithmetic formulation would not be chosen were ONS constructing a new price index, the National Statistician recommended that the formulae used at the elementary aggregate level in the RPI should remain unchanged."

This is what I wrote on November 18:

"Dropping Carli would mean the Bank would surely have to decide this was a “fundamental and detrimental” change affecting holders of index-linked gilts and National Savings. The ONS might produce a parallel RPI, using the existing method, for investors, though that cannot be a permanent solution. The longest index-linked gilts stretch half a century into the future.

"What should happen? It is daft for the ONS to carry on using an RPI formula that comes up with obviously suspect results. From a statistical and economic perspective, the case for change is overwhelming.

"The politics, however, are trickier. Unemployment figures have never regained the public confidence there was before the Tories introduced repeated changes to them in the 1980s. The Osborne £35 billion QE "grab" has had less public impact but has a whiff of something dodgy about it.

"Anything like that has to be avoided for the RPI. If the public and the markets sense trickery, trust in the inflation numbers will disappear. Like the boy who cried wolf, once you get a reputation, it can be hard for people to believe you."

What I suggested would be unworkable in the long run has happened. So we have a very messy compromise. We will have RPI, RPIJ, not to mention RPIX (the RPI excluding mortgage interest payments). We'll also have CPI, CPIH (a new index including housing costs) and, for those who are so inclined, CPIY (excluding indirect taxes). There are others too numerous to mention.

Much of the time the purchasing managers' surveys have presented a rosier picture of the economy than official data. The hope is that this time it is the other way round.

With a drop in the service sector purchasing managers' index from 50.2 in November to 48.9 in December, the all-sector PMI for the fourth quarter came in at 49.9, its weakest since 2009. Part of that weakness may be weather-related, though growth has softened on an underlying basis as well.

Though in theory this suggests a flat fourth quarter, Markit, which compiles the data, says it is consistent with a 0.2% fall, following the 0.9% rise in the third quarter. More details here.

Nobody really expected 2012 to end with good news for manufacturing but, according to the Markit-CIPS purchasing managers' index, it did. Manufacturing expanded at its fastest rate for 15 months in December, which was welcome after a difficult few months.

This is Markit's summary: "The UK manufacturing sector ended 2012 on a positive note, with levels of production and new orders rising at faster rates in December. The labour market also showed signs of stabilising, with employment broadly unchanged over the month.

"The seasonally adjusted Markit/CIPS Purchasing Manager’s Index (PMI) rose back above the 50.0 no-change level in December, recording a 15-month high of 51.4. The average PMI reading in Q4 (49.5) was above that in Q3 (48.1), while the average over 2012 as a whole was only 49.2.

"Manufacturing output increased for the second month running, with the rate of growth accelerating sharply to a 20-month high. The sharpest gains were reported by consumer and intermediate goods producers."

The second revision of the third quarter GDP figures showed a downward revision from 1% to 0.9% but upward revisions to earlier data. So growth is now flat on a year ago, compared with a drop of 0.1% in the earlier data. Two of the "double-dip" quarters, Q4 2011 and Q1 2012 have been revised higher though still show small negatives.

The detail in the numbers is quite interesting. They point to a household sector which, while still constrained by the high-inflation squeeze on earnings, has adjusted significantly. The saving ratio has risen from 7.4% to 7.7% and real household disposable income, after an odd looking 2.3% jump in the second quarter, rose by 0.4% in the third. There is much more here.

Also today, the current account deficit narrowed to £12.8 billion in the third quarter from a downward-revised £17.4 billion in the second. It remains on course for a 2012 deficit of more than £50 billion, however. Details here.

Finally, the public finances were a touch disappointing, with public sector net borrowing of £17.4 billion in November and underlying borrowing running about 10% above 2011-12 levels. This is the Office for Budget Responsibility's take on the figures. It points out that two one-off factors, the 4G spectrum sale and the transfer of £11.5 billion of gilt coupons from the Bank of England to the Treasury will benefit the figures. But it is also relying on stronger VAT and self-assessment receipts.

November's retail sales disappointed, with volumes flat on the month including automotive fuel and up a modest 0.1% excluding it. Year-on-year the figures were 0.9% and 2% respectively. Following a downbeat CBI survey on Wednesday, retailers need a late rush.

So does the economy. On both measures, retail sales volumes are down on their third quarter average, and threaten to be a drag on fourth quarter gross domestic product. It is instructive that retail sales have disappointed in October and November as higher inflation has squeezed real incomes. More here.

A clutch of inflation data today, which require some interpreting. Consumer price inflation was unchanged at 2.7%, which suggests calm but disguises a huge amount going on beneath the surface. So food, non-alcoholic beverages and domestic fuel bills were up, while petrol and diesel were down. RPI inflation fell from 3.2% to 3% on the back of lower motoring costs, housing and household goods.

Underlying CPI inflation, excluding food, energy and other volatile elements was 2.6%, so close to the headline rate. Inflation at constant tax rates was 2.4%. Whichever way you look at it, inflation was above the 2% target. More here.

Producer price numbers were relatively reassuring, with output prices for manufactured products up 2.2% on a year earlier in November, from 2.6% in October, while input prices were down 0.3%. Inflation is not, however, being driven by manufactured goods. More here.

Also today, the Office for National Statistics reports that house prices in the 12 months to October were up 1.5% on a year earlier, with prices stable in most of the country, rising in London and falling in Northern Ireland. Details here.

Britain's inflation target has had a good innings - it is now more than 20 years old. Long before it was adopted there wre prominent campaigners for a money or nominal gross domestic product target. Now, thanks to a speech my Mark Carney, Bank of England governor-designate, and an apparently open mind from George Osborne, it is back on the agenda.

Maybe, though the test is whether anything would have been different before the crisis with a money GDP target. Say the target was 5%. This was the kind of growth rate that was being achieved for money GDP in the run up to the global financial crisis.

Money GDP weakened in 2008, though only when real GDP collapsed. It would not have given any advance warnings of trouble, particularly as the originally GDP readings from the Office for National Statistics for the first half of 2008 were misleading.

The problem in the run-up to the crisis was not that money GDP was ignored. It was that other things were played down, including sharply rising asset prices and a sharp rise in bank lending to other financial institutions. The financial sector lent to itself, and the authorities did not respond.

Another generally good set of labour market statistics, with unemployment down by 82,000 in the August-October period compared with May-July to 2.51m, and down by 128,000 on a year earlier. The unemployment rate, 7.8%, compared with 8% in May-July and 8.3% a year earlier. The resilience of the labour market in the fact of apparently weak growth continues to be striking.

In the latest three months employment rose by a modest 40,000, though this was enough to take it to a record 29.6m (though the composition has changed compared with the previous high). More impressive was the rise compared with a year earlier, a very strong 499,000.

The private sector continues to drive the rise in employment, with a rise of 65,000 in the third quarter, compared with a drop of 24,000 in public sector employment. Between September 2011 and September 2012 private sector employment rose by an astonishing 823,000 (though 200,000 is due to classification changes), while public sector employment fell by 324,000. Leaving out the classification changes (mainly affecting further education colleges), the figures would be roughly 623,000 and 124,000 respectively.

Rising employment/falling unemployment and subdued wages are all part of the same story and so it continues. In August-October total pay, including bonuses, was up by 1.8% on a year earlier, so still falling in real terms. More here.

October was a bad month for industry. Britain's 0.8% drop in overall industrial production was bad enough, including as it did a 1.3% drop in manufacturing outout, though it was not as dire as Germany's 2.6% slump.

The UK figures have already got analysts on triple dip alert, despite an encouraging rise in third quarter construction orders, also announced today. The arithmetic for industrial production is pretty horrible - in October it was 2.4% below the third quarter average.

It will need something special, such as a rebound in food production (down 3% month-on-month in October) and a turnaround in North Sea production, assuming some of the slump is shutdown related. In October mining and quarrying, most of which is the North Sea, was 15% below its third quarter average and 21% down on a year earlier. Not so much a decline as a collapse. More here.

Losing one of his fiscal rules would have been bad enough, seeing a deficit-reduction programme turn into a deficit-increasing programme quite another thing. So George Osborne got away with it today.

Nobody was surprised by the Office for Budget Responsibility's judgment that his secondary fiscal rule - debt falling as a percentage of GDP by the end of the parliament (2015-16) - will probably now not be met, though it should still be achieved in 2016-17 according to the OBR.

However most people were surprised by the borrowing numbers for this year, and the fact that the OBR has concluded that deficit reduction is still in prospect even without the special factors being taken into account.

Those special factors - the transfer of QE coupons from Bank of England to Treasury (worth £11.5 billion this year), changes affecting a couple of the smaller state-owned banks - help bring down borrowing, excluding another special factor (the transfer of £28 billion from the Royal Mail pension fund), to £108.5 billion, from a prediction of £120 billion at the time of the March budget.

However it is another factor, this one a one-off, the expected £3.5 billion of assets from the forthcoming sale of the 4G mobile phone spectrum, which got Osborne off the hook. In underlying terms, borrowing this year would be £123.3 billion without these changes - up on 2011-12's £121.4 billion - but the spectrum sale gives a small borrowing reduction. Whether that reduction survives until March remains to be seen, but Osborne lives to fight another day.

Osborne used that time pretty well. A £235 increase in the already big rise in the personal tax allowance from April was unexpected, two years of generous capital allowances for SMEs should boost investment and a planned cut in the main rate of corporation tax to 21% was unexpected, particularly in the light of the row over big multinational firms not paying any.

The 3p a litre fuel duty hike, due in January, has been abandoned, which will guarantee good tabloid headlines. Many will see the squeeze on working-age welfare and the reduction in pension tax relief as unfair. But for benefits to be rising at twice the rate as average earnings over the past three years - 20% versus 10% - was unsustainable. The pension raid was Osborne's "we're all in it together" moment.

Much of the Autumn Statement had dribbled out beforehand, some deliberately, notably the helpful £5 billion shift from current to capital spending over the next three years. The only problem with that, politically, is that some of it looks like a squeeze on departments to pay for a Tory party pet project, free schools.

Even so, it was a grievous error by Labour to plan for big cuts in capital spending - that part of tax and spend which has the biggest multiplier - and a mistake for the coalition to endorse most of those cuts. Cutting current spending is always politically more difficult, so capital is an easy target. Slowly, very slowly, that mistake is being corrected.

Today's gross domestic product figures, as always, contained a lot of detail. They confirmed the 1% third quarter rise in GDP, which in turn confirmed that the economy has some way to go to regain its pre-crisis peak. The latest numbers show GDP is 3.1% down on its level in the first quarter of 2008.

But how have individual sectors and components of spending fared within that bigger picture? The services sector has done best, with output 0.4% higher than pre-crisis levels, in contrast to manufacturing, down 8%, construction, down 18.3%, and mining and quarrying, which includes the shrinking North Sea oil and gas sector, down 34.5%.

Business services and finance are a mere 1.2% down on pre-crisis levels but the undoubted star of the services sector is "government and other services", up 6.7%.

In terms of expenditure, consumer spending is 4.9% below pre-crisis levels, while investment - including public investment - is a huge 18.8% down. Government consumption, however, is up by 4.5%. Exports are up 2.3%, while imports are down 3.9%, so there's been a little bit of rebalancing. All the numbers are inflation-adjusted.

The GDP release is here, as is a link to the database.

There was some relief that the gross domestic product figures for the third quarter were unrevised, the preliminary rise of 1% having taken people by surprise. Though it is hard to draw any meaningful conclusions from these numbers, on their own they were encouraging.

So consumer spending rose by 0.6% in real terms, its best for nine quarters, and was up by 0.9% on a year earlier. Some of this was a clear Olympics effect, though there was also a large - 1.4% - rise in compensation of employees, its biggest for 11 quarters.

If you were looking for rebalancing, there was some of it too, exports rising by 1.7% on the quarter, while imports fell by 0.4%. Overall investment rose by 0.5%, while business investment jumped by 3.7%.

It was, of course, a distorted quarter, and we will know more about what will undoubtedly be a more muted performance in this and subsequent quarters. There were no revisions to earlier quarters in this release. More here.

At a time when everybody was expecting Paul Tucker to be announced as Bank of England Governor, including me, I can draw two modest crumbs of comfort from this afternoon's announcement that it will be Mark Carney, Governor of the Bank of Canada.

The first is that in my piece on November 11 I said that Carney was still in the frame. The second was the conclusion of that piece: "The bookies are probably right to have Tucker as favourite. He remains the one to beat. But a credible dark horse, a genuine outsider, might be better."

Having said that, it is hard not to feel sorry for Tucker. To be a defeated favourite in such a public contest is hard. As for Carney, the key question will be whether his success as Bank of Canada Governor will translate into the much bigger job at the Bank of England. There are more differences than similarities.

Carney is who the Treasury wanted, and they pursued him doggedly. Sir Mervyn King said: "He represents a new generation of leadership for the Bank of England, and is an outstanding choice to succeed me. Since Mark became Governor of the Bank of Canada, I have worked closely with him and admired his contributions to the world of central banking, in which he is widely respected." He may have preferred an outsider to succeed him.

Charlie Bean will stay on as deputy governor with responsibility for monetary policy for another year, until mid-2014.

October's public borrowing figures, £8.6 billion for public sector net borrowing compared with £5.9 billion a year earlier, were disappointing. However, downward revisions to earlier months meant that the underlying overshoot so far this fiscal year - £5 billion - was not as bad as it could have been.

The big picture is that public sector net borrowing is heading for a modest overshoot compared with last year, mainly because of weak tax revenues (particularly corporate tax revenues, which were down 9% on a year earlier). Given that that 2011-12 borrowing figure came in £4.6 billion below Office for Budget Responsibility projections, that is disappointing but not disastrous. More here.

Meanwhile, the Bank of England's monetary policy committee, appeared to rule out any cut in Bank Rate: "The Committee also discussed the likely effectiveness of reducing Bank Rate to below 0.5%. Over the past few months, Bank staff had consulted with the FSA and the Building Societies Association on the possible consequences. In the light of that, the Committee had re-examined in detail the desirability of such an option. While it would be beneficial for some existing borrowers, there were concerns that a cut in Bank Rate might prove counterproductive for aggregate demand as a whole. Staff analysis had concluded that a further cut in Bank Rate would be likely to cause a reduction in the profitability of some lenders, especially building societies, because of the prevalence of loans with interest terms contractually or closely linked to Bank Rate. That would weaken their balance sheets and they might have to respond by increasing other loan rates or restricting lending. Viewed against the backdrop of the Funding for Lending Scheme (FLS), and the potential for building societies to play a material role in increasing lending, the Committee judged that it was unlikely to wish to reduce Bank Rate in the foreseeable future."

There was one vote for more quantitative easing, from David Miles. The MPC also said it would review its tactics once the existing portfolio of gilts began to mature in March 2013. More here.

The Institute for Fiscal Studies has undertaken a useful exercise in the fiscal consequences of Scottish independence. Anybody who was expecting a clear-cut answer, however, will be disappointed.

The broad conclusion is that Scotland could finance its higher public spending (£1,200 a head higher) in the short-term if it has a geographical share of North Sea revenues - i.e. most of them - but would face hard choices in the longer term as these revenues decline.

That assumes an independent Scotland would get a geographical share of those revenues, which is far from guaranteed. The IFS also concedes that the future state of the UK's public finances are far from certain. Its report is here.

The CBI had suggested quite perky retail sales in October in its distributive trades survey, while the British Retail Consortium had a much more subdued picture. On this occasion the BRC was the best guide.

Retail sales in October were disappointing, volumes falling by 0.8% compared with September, or 0.7% excluding automotive fuel. Volumes were up by a modest 0.6% on a year earlier, or 1.1% excluding fuel. The fact that October's volume index was below the third quarter average shows that the sector has work to do in the fourth.

That might be made easier by the timing of half-term holidays for many schools, which traditionally boost spending. The cut-off for the October numbers was October 27, many half-term holidays coming later than that. Nevertheless, downbeat figures. More here.

I wasn't at the Bank of England's Inflation Report press conference, but most of the good lines appear to have been contained in Sir Mervyn King's opening statement. All the Bank's earlier optimism about recovery appears to have evaporated - it now takes the view we are stuck in a low growth era. The following is a textual analysis of the main points in that opening statement.

"Continuing the recent zig-zag pattern, output growth is likely to fall back sharply in Q4 as the boost from the Olympics in the summer is reversed – indeed output may shrink a little this quarter. It is difficult to discern the underlying picture. It is probably neither as good as the zigs suggest nor as bad as the zags imply. Despite a resilient labour market– as we saw again in today’s figures – the economy has barely grown over the past two years."

Which means: The economy's still flat and I'm not going to get caught out again if GDP falls in the fourth quarter.

"That unexpected weakness reflects the impact of the euro area crisis and its effect on confidence and bank funding costs, and the sharp squeeze on real incomes from higher than expected world energy and food prices. As some of these headwinds abate – as they look set to do – a slow recovery is in prospect, supported by a fall in bank funding costs brought about in part by the Funding for Lending Scheme."

Which means: I wasn't wrong to back George Osborne's fiscal tightening - the weakness is due to other factors - and we're doing our best (belatedly) to get credit growing again.

"GDP growth is more likely to be below than above its historical average rate over the entire forecast period. The subdued recovery reflects a judgement that the global environment will remain unfavourable. In addition, the Committee believes that the effective supply capacity of the economy is likely to continue to grow slowly over the forecast period."

Which means: The economy's damaged and it is going to stay damaged. Even if we could get growth going, the supply-side's been badly weakened.

"Inflation is likely to remain above target for the first part of the forecast period, and is higher than in August, reflecting recent outturns and the announcement of large increases in household energy prices. Further declines in inflation are being checked by price increases in sectors where market influences are weak – the rise in student tuition fees alone added over 0.3 percentage points to yesterday’s inflation figure, and domestic gas and electricity prices are rising faster than wholesale energy prices. Such factors are pushing up inflation by over 1 percentage point a year, and the rate of inflation in those sectors influenced more by market pressures would have to be unusually low for inflation overall to be close to the 2% target. Nevertheless, the Committee judges that inflation is likely to fall back in the second half of
next year, as the impact of short-term pressures wears off and slack bears down on pay growth. Towards the second half of the forecast period, the risks to inflation are broadly balanced around the target."

Which means: Damn, we've got it wrong on inflation again, but it isn't our fault. We won't see 2% inflation again on my watch.

"For a country like the United Kingdom attempting to rebalance her economy such an outlook poses real challenges. If that unfavourable world environment persists – and there is little sign of any change to the underlying problems in the euro area – it may be unreasonable to expect anything other than a slow and protracted recovery absent a further fall in the real exchange rate. In such an environment, there are limits to the ability of domestic policy to stimulate
private sector demand as the economy adjusts to a new equilibrium. But the Committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases."

Which means: Despite the absence of any evidence that sterling's 2007-8 fall did any good, I'd like to see another fall in the exchange rate. And all this QE we've been doing hasn't been a waste of time and money - honest.

The inflation report is here.

The latest unemployment figures were encouraging, though suggest some softening in employment growth, possibly as a result of an unwinding of the Olympic boost. Employment rose by 100,000 in the July-September period compared with April-June, reaching 29.58m.

Though this was good news, it pointed to a slower rate of employment growth than recent quarterly numbers of 200,000 or more. Unemployment fell by 49,000 to 2.51 million in the latest three months, though the claimant count rose by 10,100 to 1.58 million in October alone.

Earnings growth remains sub-2% - 1.8% for total pay - at a time when inflation has pushed higher to 2.7%.

Good news, then, overall, but tempered by one or two softer touches and the squeeze on real earnings. More here.

Inflation came very close to the 2% target in September, falling to 2.2%. But now it has moved further away again, rising to 2.7% in October. RPI inflation increased from 2.6% to 3.2%. University tuition fees were the main reason.

Inflation measures adjusted for tax changes also rose - CPI inflation excluding indirect taxes rose from 2.1% to 2.7%, while CPI inflation at constant tax rates went up from 2% to 2.4%. It may be some time before we see inflation back to target.

According to the Office for National Statistics:

•The Consumer Prices Index (CPI) annual inflation stands at 2.7 per cent in October 2012, up from 2.2 per cent in September. The main upward pressure came from the education sector (university tuition fees) with smaller upward contributions from food & non-alcoholic beverages and transport. These were partially offset by downward pressures from the housing & household services, recreation and miscellaneous goods & services sectors. The CPI stands at 124.2 in October 2012 based on 2005=100

•The Retail Prices Index (RPI) annual inflation stands at 3.2 per cent in October 2012, up from 2.6 per cent in September. The largest upward pressure came from university tuition fees, followed by food and housing. Fuel & light provided the largest downward pressure. The RPI stands at 245.6 in October 2012 based on January 1987 = 100

More here.

The City is all a flutter over today's announcement that the Bank of England is to transfer the coupon, or interest, on the gilts it has been buying under the £375 billion quantitative easing programme back to the Treasury. At a stroke, it seems, government debt will be reduced by £35 billion and the public finances will have received a much-needed fillip.

Three points can be made on this:

- the Bank of England did not want this change. It regarded the accumulated coupons as insurance against the likely capital losses it would make on selling back the gilts it has bought, some probably at the top of the market.

- Other countries adopt the practice of automatically transferring interest back to their treasury departments though this does represent a rule change in the UK, and will be seen as a reflection of official concern about the public finances.

- To the extent these coupons were accumulating at the publicly-owned Bank, it amounts to a clever accounting change.

This is from the initial assessment of the change from the Office for Budget Responsibility:

* Public sector net borrowing will be lower in the near term than it otherwise would have been, as the Treasury receives the coupon payments on the gilts held by the APF (Asset Purchase Facility), minus the interest that the APF has to pay the Bank for the loan that allowed it to purchase them.

* Net borrowing is then likely to be higher in future years as the APF moves into deficit and the Treasury has to cover this. The APF's interest payments will increase when Bank Rate starts rising. And the sale or redemption of gilts is likely to leave it facing capital losses, as the amounts received will probably be smaller than the amounts paid for them.

Britain still has a very large trade deficit but at least, for now, it is heading in the right direction. The overall deficit on goods and services narrowed to £2.7 billion in September, from £4.3 billion in August, and to £8.5 billion in the third quarter from £10.1 billion in the second. Moderately encouraging. More here.

A 1.7% fall in industrial production between August and September was bad news, though it was accompanied by a 0.1% increase in manufacturing output, which was better than expected. Falling North Sea output, down more than 15% on the month, was to blame for the difference.

There will be some relief that this September drop in industrial production will not impact on the third quarter GDP figures. The 0.9% rise in the third quarter was smaller than the 1.1% estimated in the GDP release but the difference is not large enough for a GDP revision. Given that the North Sea slump appears to reflect summer shutdowns lasting longer than usual, this could, paradoxically, help the October figures along. More details here.

Elsewhere, the Society of Motor Manufacturers and Traders reported a 12.1% increase in new car registrations in October compared with a year earlier. Private registrations were up a very strong 23.9%.

The Halifax said house prices fell by 0.7% in October, for a drop of 1.2% over the latest three months and 1.7% on a year earlier.

The service sector puchasing managers' index might have come to the rescue following weak manufacturing news but it was not to be. It dropped to 50.6 in October, from 52.2 in September. The composite PMI, made up of construction, manufacturing and services, dropped to 49.7, suggesting a modest overall contraction in economic activity.

"Further growth of UK services activity was recorded during October, although the rate of expansion slowed to a marginal pace. Growth of new business also eased during the month, leading companies to deplete backlogs of work. Meanwhile, staffing levels were reduced for the second month running.

"On the price front, a further solid increase in input costs was recorded in October, but companies were still reluctant to fully pass on higher cost burdens to their clients and output prices rose only marginally.

"The headline seasonally adjusted Business Activity Index posted 50.6 in October. Although this reading still signalled an expansion in services activity during the month, it was below the mark of 52.2 in September. Moreover, the rate of growth was the slowest in the current 22-month period of rising activity.

"Those respondents that recorded an increase in business activity linked this to signs of improving underlying demand and client confidence. However, other panellists reported that these improvements remained only tentative. Strong competitive pressures were also mentioned."

The PMIs show that the fourth quarter has started on a weak note. The only crumb of comfort may be that they are not always well correlated with official data.

Whatever the distortions and special factors, the 1% rise in GDP in the third quarter was welcome. It suggested that there has been underlying growth in the economy, not just in the third quarter but in the second as well, so that "longest double-dip recession in 50 years" should be put to bed.

The best way to look at the figures, according to the statisticians, is to take the second and third quarters together. GDP fell by 0.4% in the jubilee-affected second quarter and rose by 1% in the third, making for a 0.6% rise over the two. 0.2% of this was Olympic ticket sales, leaving 0.4% underlying growth, 0.2% in each quarter. Not strong by any measure, but the right side of zero.

The 1% GDP rise compared with expectations of a rise of between 0.4% and 0.8%. Is it a little toppy? The Office for National Statistics has pencilled in a small 0.5% fall in service sector output in September, though it doesn't yet have the data. The 2.5% quarterly fall in construction sector output looks a bit too pessimistic.

It makes a change, however, for the ONS to produce figures that surprise on the upside. More here.

Three things were notable from Sir Mervyn King's speech to the South Wales Chamber of Commerce in Cardiff. The first, which is not unusual, was the sombre tone and the admission that there are limits to what monetary policy can do in this situation.

The second was his concern about the banking system. The £80 billion Funding for Lending Scheme should get more credit into the economy, he said, but also: "The window of opportunity which it provides must be used to restore the capital position of the UK banking system." This appears to be giving the banks a green light to use the scheme as much to help themselves as the economy.

He also rejected an array of alternatives that have been suggested, including the writing off of the gilts the Bank has acquired under quantitative easing and a so-called helicopter drop of money onto the economy. He said: "There has been some talk about the possibility that money created by the Bank could be used directly to finance additional government spending, or even that money could be given away. Abstracting from the colourful metaphor of “helicopter money”, such operations would combine monetary and fiscal policies."

And concluded: "Not only is combining monetary and fiscal policies unnecessary, it is also dangerous. Either the government controls the process – which is “bad” money creation – or the Bank controls it and enters the forbidden territory of fiscal policy. It is peculiar, to say the least, that some of the same people who believe that the Governor of the Bank is too powerful also believe that he should stand on the steps of Threadneedle Street distributing £50 notes – a policy which you will appreciate is rather hard to reverse. For the same reason, the Bank could not countenance any suggestion that we cancel our holdings of gilts. The Bank must have the ability to reverse its policy – to sell gilts and withdraw money from the economy – when that becomes necessary. Otherwise, we run the risk of losing control over monetary conditions."

That's the strongest defence of the Bank's QE model I have seen. Given that some of these more unconventional ideas, rightly or wrongly, have been associated with Lord Adair Turner, a candidate to succeed King as Governor, it must also be seen as a slapdown for him. The speech is here.

One of the the regular themes here has been that it was premature to talk about a big borrowing overshoot on the basis of monthly figures for the first few months of the fiscal year. The distortions in the data, including a new Treasury system for monitoring spending meant that few sensible conclusions could be drawn.

So it is proving. Public sector net borrowing in September was £12.8 billion, £0.7 billion down on a year earlier. More significantly, revisions to earlier data mean that borrowing for the first half of the fiscal year, £65.1 billion, is only marginally up on the £62.4 billion figure for a year earlier.

Tax receipts in September, up by 3.7% on a year earlier, were stronger than in recent months. More details here on the numbers.

They are important in economic terms, but also important politically. Labour unwisely bet the ranch at its party conference on a big overshoot in borrowing this year. Oddly, it is is persisting with this attack even though the numbers are coming back towards official projections. But then Labour has a long way to go to get back credibility on the public finances.

After slipping by 0.1% in August, when people appear to have been distracted by the Olympics, retail sales volumes rose by 0.6% in September. Volumes were up by 2.5% on a year earlier (2.9% excluding automotive fuel), and by 1% in the third quarter compared with the second (0.7% excluding fuel). This should mean consumer spending makes a reasonable contribution to third quarter growth.

Sales value rose by 1.1% between August and September, following a 0.2% increase between July and August. The Office for National Statistics attributes some of that rise to school uniforms, though September seems a little late for that. More here.

Another excellent set of labour market numbers, the highlights of which are as follows:

The employment rate for those aged from 16 to 64 for June to August 2012 was 71.3 per cent, up 0.5 from March to May 2012. There were 29.59 million people in employment aged 16 and over, up 212,000 from March to May 2012.

The unemployment rate for June to August 2012 was 7.9 per cent of the economically active population, down 0.2 from March to May 2012. There were 2.53 million unemployed people, down 50,000 from March to May 2012.

The inactivity rate for those aged from 16 to 64 for June to August 2012 was 22.5 per cent, down 0.3 from March to May 2012. There were 9.04 million economically inactive people aged from 16 to 64, down 138,000 from March to May 2012.

Between June to August 2011 and June to August 2012, total pay (including bonuses) rose by 1.7 per cent and regular pay (excluding bonuses) rose by 2.0 per cent.

Overall employment is now back above pre-crisis levels, though its composition has changed. The ONS has done a useful five-year comparision, available here - all in all, another remarkably good set of numbers.

The drop in inflation to 2.2% in September, from 2.5% in August, is welcome in its own right, by easing the squeeze on real incomes. It is also good news for the government, being the monthly number used for next spring's benefit uprating. The Treasury has already been hinting at not uprating benefits by the full amount of indexation. This number may mean the political flak is not worth it. Retail price inflation fell from 2.9% to 2.6%.

The shape of things to come is hinted at by the producer prices index, which showed that factory gate prices rose by 2.5% in the 12 months to September, up from 2.3% the previous month. Input prices, however, fell by 1.2% in the 12 months to September.

In a busy day for news on prices, the Office for National Statistics said house prices rose by 1.8% in the 12 months to August.

The Nobel prize for economics - the Bank of Sweden prize - has been awarded to Alvin Roth and Lloyd Shapley for their work on "the theory of stable allocations and the practice of market design". A reasonably accessible explanation of their work is here.

Lord Adair Turner, chairman of the Financial Services Authority and candidate for the Bank of England governorship, has done a mea culpa on his earlier advocacy of euro membership for Britain. In a speech at the Mansion House, he said:

"Ten years ago I argued in favour of the Eurozone project and for Britain’s eventual membership. As I have said before, I was wrong, failing to recognise the inherent flaws in the Eurozone’s current design. And it’s important for both individuals and institutions to recognise mistakes and learn from them.

"The crucial mistake was a failure to recognise that debt issued by a nation within a multinational currency zone is quite different from debt issued by a nation which also issues its own currency – it is inherently more susceptible to default risk, it is inherently less likely to be perceived as risk-free. As a result, in a multi national currency zone with significant debt issued at national level, bank solvency and national solvency can become linked in a potentially fatal embrace."

Turner will also have endeared himself to Sir Mervyn King (or not) with his comments on monetary policy: "Quantitative easing alone may be subject to declining marginal impact, the economy facing a liquidity trap in which replacing private sector holdings of bonds with private sector holdings of money has little impact on behaviour and thus on demand. So optimal policy also needs to include a willingness to employ still more innovative and unconventional policies, and to consider the combined impact of multiple policy levers – monetary policy, Bank of England liquidity insurance, prudential regulation and direct support to real economy lending – which we used either to consider quite separately, or else avoid entirely." The speech is here.

Today's industrial production figures, for August, looked disappointing, with falls of 0.5% for overall output and 1.2% for manufacturing but they followed big jumps, of 2.8% and 3.1% respectively, in July. Industrial production in July-August was 1.4% up on the second quarter average, while manufacturing was up 1% on the same basis, suggesting a significant contribution to growth from both in the third quarter. More details here.

The National Institute of Economic and Social research, here, suggests GDP rose by 0.8% in the third quarter, though some of that reflects a bounceback from the Jubilee-affected second quarter. It rightly points out that underlying growth in both quarters was probably 0.2% to 0.3%.

There was bad news on trade today, with the deficit widening to £4.2 billion in August, from £1.7 billion in July. The size of the trade deficit is worrying, particularly given the advantages of a competitive pound. Behind the statistical noise there is an underlying deterioration. More here.

George Osborne's Tory conference speech was pretty dour, and did not contain much that was new. Further welfare cuts will be needed as the government takes fiscal consolidation even further into the next parliament, and there was an eye-catching, if highly controversial proposal, for workers to surrender some employment rights in return for employee shares that will be taxed at a zero CGT rate.

On policy, this was most significant: "We have never argued that you stop what economists call the automatic stabilisers operating - the lower tax receipts and extra government payments that follow if, for example, the global economy turns down." That will be the Autumn Statement defence for missed fiscal targets. The speech is here.

Just as the GDP figures gave an artificial impression of weakness in the economy in the second quarter, so the third quarter numbers risk giving an artifical impression of strength. The service sector purchasing managers' index for September showed a fall from 53.7 to 52.2, below market expectations of 53.

There was good and bad news in the survey. The employment component dropped below 50, suggesting a drop in jobs, but new work rose at its strongest rate since May. The headline on the release by Markit, which prepares the data, is: "Faster rise in new business supports solid increase in activity during September."

So we should not be too gloomy. But the average level of the three purchasing managers indexes for the third quarter, 51.1, is according to Markit consistent with only 0.1% growth. It is the unwinding of the Jubilee effect, perhaps contributing 0.4% or 0.5%, which will provide a healthier picture.

The big picture, as it has been over the past three years, is of an economy growing modestly, at something like a 1% rate. There is nothing in these surveys to suggest a breakout from that.

Service sector output bounced in July, as expected, rising by 1.1% on the month as it recovered from the July distortions. The service sector has grown by 0.1% over the latest three months (despite the June drop) and by 0.7% on a year earlier. So most of the economy - services are 77% of gross value added - has been growing. July service sector output was up by 0.3% on the second quarter average. More here.

The revised Q2 gross domestic product figures - the Office for National Statistics' second GDP revision and third take on the numbers - showed the expected trimming of the fall from 0.5% to 0.4%. The latest estimate compares with an initial 0.7% decline. If the extra Jubilee bank holiday trimmed GDP by 0.5% in the second quarter, underlying growth was flat to marginally up.

Until the latest figures, GDP had fallen in five out of 12 quarters since the recovery began in mid-2009. One of those has now been revised away: the second quarter of 2011 now shows a small 0.1% GDP rise. There will be many more revisions to come.

The details of the latest release are interesting. Consumer spending fell by 0.2% in the second quarter, up from an initial 0.4% fall. This occurred despite an apparent 1.9% jump in household real disposable income. However, consumer spending is now thought to have grown modestly over the past year, by 0.2%, which sits more easily with the retail sales figures.

Business investment was revised higher, and government spending growth lower. The big drag on GDP over the past year has been net trade (exports minus imports), which subtracted 0.9 percentage points from growth, suggesting that eurozone woes have played a significant part in the UK's growth disappointments. More here.

Most of the commentary on the public finances will focus on the continued overshoot compared with last year. That was not the case in August - public sector net borrowing of £14.4 billion was identical to a year earlier - but remains the case on the cumulative numbers.

So public sector net borrowing in April-August (excluding the Royal Mail distortion) was £59 billion, compared with £48.4 billion in the corresponding period of 2011-12. All other deficit measures are up, for the simple reason that spending is rising faster than tax receipts.

The news, however, is not yet that bad. The Office for National Statistics also announced a big downward revision to 2011-12 borrowing, to £119.3 billion. That is not only £6.7 billion below the Office for Budget Responsibility forecast for the year, but below its forecast for the current year (£119.9 billion).

It is also a reminder that these numbers get extensively revised, and often down. One attack on the coalition's fiscal strategy has been that its borrowing numbers have been consistently revised up. The latest outturn for 2011-12 is quite close to the OBR's initial forecast of £116 billion, made in June 2010. We may get down there in time.

The new numbers cast the coalition's stratagy in a better light. In its first two years, it reduced the deficit from £159 billion to £119 billion.

There is also an uncertainty concerning "OSCAR", the Treasury's new system for controlling and monitoring spending. According to the ONS:
"HM Treasury has replaced its COINS system for financial reporting with a new Online System for Central Accounting and Reporting (OSCAR) for 2012/13 onwards. This system collects public spending data from central government departments and the devolved administrations. August is the fourth month that the central government spending data for 2012/13 has been produced using this system. Although the data are for the most part of comparable quality to previous years, there are still some initial data and system issues. Resolving these issues may lead to larger than normal revisions in the central government expenditure data reported over the first half of 2012/13."

More here.

Retail sales volumes slipped by 0.2% last month, which was slightly less than expected, but suggesting there was no Olympic boost for retailers. The effect, however, seems to have been mainly on online sales - people watched the Olympics and Paralympics rather than clicking and shopping.

So, clothing and footwear sales rose by 1.6% on the month, partly as a result of aggressive discounting, food sales also rose, while there were 2.7% drops in household goods sales and 6.7% in non-store retailing. The percentage of retailing online droppped from 9% to 8.1%.

However there was also a positive Games effect. According to the Office for National Statistics: "The largest contribution to growth in the non-food sector came from the other stores category in particular sporting goods and toys. Feedback from these stores suggests that sales were boosted by an increase in sales of football shirts with the start of the new season and the European Championship but also from increased sales as a result of the Olympics."

Overall, the sales picture over the past 12 months looks surprisingly healthy given the squeeze on real incomes, with a rise of 2.7% in volumes in August compared with August 2011, 3.1% excluding petrol and diesel sales. Non-food sales rose by a very strong 5% in volume terms.

There's a note of caution, of course. This year there are Olympic/Paralympic distortions, last year we had the riots in London and other cities (though retail sales fell by only 0.6% on the month). We will get a better picture in the run-up to Christmas. More here.

Consumer price inflation dropped from 2.6% in July to 2.5% in August, with retail price inflation down from 3.2% to 2.9%. Both falls were welcome and imply that inflation - 5.2% last September - has halved in less than a year.

According to the Office for National Statistics: "The largest downward pressures behind the change in the CPI rate came from furniture, household equipment & maintenance, housing & household services (particularly domestic gas) and clothing & footwear. These were partially offset by an upward pressure from transport (particularly motor fuels)."

The question is what happens next. The ONS notes that petrol prices fell between August and September last year, while they have risen this September. Some gas and electricity prices will be rising in the autumn, as has already been announced. The poor summer and weather events around the world will push up food prices.

On the positive side, the latest figures continued a pattern in which inflation has been generally subdued in 2012. The consumer prices index in August was less than 1.2% up on its December 2011 level. Although there are seasonal patterns in inflation, this implies that inflation this year has been running below the 2% target.

Can this continue? For inflation to fall further monthly rise sin the index have to be lower than a year ago. That looks achievable in September - last year the index rose by 0.7% - but more of a challenge for October and November, when the increases were 0.1% and 0.2% respectively.

This is not just a matter of statistical interest, of course. Even at 2.5% inflation, prices are rising a percentage point faster than average earnings. To restore the growth in real incomes, and get consumers spending more, inflation needs to drop below 2%. That is still far from guaranteed. More here.

Separately, the Office for National Statistics, said it would review the construction of the retail prices index to deal with a longstanding anomaly, the so-called formula effect, which boosts measured retail price inflation.

Employment rose by 236,000 in the three months to July and, at 29.56m, is within a whisker of its pre-recession peak of 29.57m. The corresponding fall in unemployment over the period, 7,000, is disappointing, though there was a bigger 181,000 fall in economic inactivity during the quarter. The claimant count dropped by 15,000 to 1.57m between July and August.

The Office for National Statistics has usefully contrasted the pre-recession employment peak, in March-May 2008, with the current position. As it notes, since then there has been a 640,000 fall in full-time employment, a 628,000 rise in part-time employment, a 978,000 rise in employment, a 60,000 drop in economic inactivity (16-64) and a 1.524m increase in the 16-plus population. So some way yet to go.

More here. Other highlights:

* The employment rate for those aged from 16 to 64 was 71.2%, up 0.5 on the quarter. There were 29.56 million people in employment aged 16 and over, up 236,000 on the quarter.

* The unemployment rate was 8.1% of the economically active population, down 0.1 on the quarter. There were 2.59 million unemployed people, down 7,000 on the quarter.

* The inactivity rate for those aged from 16 to 64 was 22.4%, down 0.5 on the quarter. There were 9.01 million economically inactive people aged from 16 to 64, down 181,000 on the quarter.

• Total pay (including bonuses) rose by 1.5% on a year earlier, down 0.3 on the three months to June 2012. Regular pay (excluding bonuses) rose by 1.9% on a year earlier, up 0.1 on the three months to June.

The trade figures for July underline the folly of those who rushed to draw conclusions from the Jubilee-affected June numbers. The overall trade deficit narrowed sharply from £4.3 billion in June to £1.5 billion in July, while the goods deficit fell from £10.1 billion to £7.1 billion.

In July alone, the value of exports rose by 9.3%, while imports fell by 2.1%, proof that the June distortion hit exports significantly. Of course, no conclusions can be drawn from monthly movements between June and July.

A better guide is the three monthly picture, which shows that the overall trade deficit narrowed to £8 billion in the May-July period from £10.5 billion in the previous three months. Export volumes rose by 0.9%, excluding oil and erratics, while import volumes fell by 0.8%. There's a long way to go, but at least it is in the right direction.

The figures continue to show that exporters are being hit by the eurozone crisis, while making progress in non-EU trade. In the latest three months goods exports to the rest of the EU edged up by 0.3% but were down by 4.4% on a year earlier. Non-EU exports rose by 4.5% and were 12.5% on a year earlier. More here.

After the distortions to the data for June, caused by two additional bank holidays (one shifted from May), there is a distortion in the opposite direction for July, industrial production jumping by 2.9%, its biggest monthly rise for 25 years, while manufacturing output rose by 3.2%. The release includes revisions to data for earlier months.

Reading through the distortions, industrial production in July was 1.6% above its second quarter average, so if it were to hold at the July level industry would make a significant contribution to GDP growth for the first time in several quarters. Industrial production was still down by 0.8% on a year earlier, while manufacturing output was down 0.5%, though in both cases these growth rates will soon turn positive if output merely holds at July levels. More here.

Also released, producer price figures for August showing a strong 2% rise in input prices (up 1.4% on a year ago), while output prices rose by 0.5% (up 2.2% year-on-year).

America is the best of a mediocre bunch in the OECD's latest interim assessment, with growth accelerating to a 2.4% annual rate by the fourth quarter. The eurozone remains the biggest threat to the global economy, with even Germany set for two quarters of recession in the remainder of 2012. The OECD's short-term forecast for Britain is downbeat, with an annualised GDP decline of 0.7% in the third quarter, followed by growth of 0.2% in the final three months of the year adding up to a 0.7% GDP drop for 2012 as a whole. Curiously, however, the OECD has not tried to adjust for the likely bounce in activity in the third quarter arising from Jubilee and Olympic distortions. The assessment is here.

The Bank of England, as expected, left Bank rate unchanged at 0.5% and made no change to the existing £375 bilion of quantitative easing.

A new edition of Free Lunch: Easily Digestible Economics is out, extensively revised in the light of the events of the past five years. Intended to introduce new readers to the subject, or to refresh others, it is available by clicking here. Signed copies may be available by contacting me at the economicsuk e-mail address.

This is from the introduction to the book:

This is a book about economics. I used to say that as a half-apology, knowing that economics had to work quite hard to compete with other subjects, not to mention most other things in the bookshop. Things are different now, thanks to the global financial crisis that began in the summer of 2007 and was from over in the run-up to its fifth anniversary as this was being written. The crisis came like a whirlwind, damaging everything in its wake but also shaking up perceptions, including those about economics. Everybody has a view on the crisis, and most people have something to be angry about, with bankers, regulators, politicians and even economists. Apart from the fact that the repercussions of the crisis will live in the memory for decades, its effects are real.

Would we have had severe cuts in public spending and tax hikes in the absence of the crisis? Would, to take a simple example, the coalition government in Britain have been emboldened enough to introduce big increases in university tuition fees? Would there have been a coalition government at all, a rarity in Britain, in the absence of the crisis? The crisis drew into sharp focus questions about how modern economies operate.

It marked a shift from the easy, credit-driven growth of the 1990s and 2000s into something very different. Banks were safe, staid institutions, were they not? No, and in the autumn of 2008, the Western banking system came very close to collapse. This was the time when at a practical level the cash machines almost did not get refilled, the supermarket shelves almost were not restocked, the wages not paid. It was very close to a full state of economic emergency, in Britain and in other countries.

So, without wishing that kind of crisis on anybody, it seems to me that it taught us that everybody should take an interest in economics, and not just at times of great turbulence. The crisis, you will find, makes appearances throughout this book but it does not dominate it. For this is a book about economics. And it is a book about economics quite unlike any other. There are no tricky diagrams of the kind that leave you wondering whether the page has been printed the right way up. There are no complicated mathematical equations. Unless something can be easily explained, it has no place in this book. Above all, at a time when we all need to know some economics, it is intensely practical. This book will not necessarily make you a millionaire – I always say that the only economists you see driving Rolls-Royces are wearing a chauffeurs’ caps – but it will tell you about the process by which we become, mainly, better off, apart from when those crises hit. It is also, I hope, good fun.

The aim of this book is to fill a gap, just like a good lunch. For years, at The Sunday Times and elsewhere, readers have been asking me to recommend an easily digestible book on economics, either for non-economists or for those whose grasp of it is a little rusty. Until now I have found it difficult to do so. There are some excellent textbooks on economics, some of which I shall recommend later, but they are intended for formal courses of study, with teachers offering a guiding hand. This is different. I hope that many students will read and profit from Free Lunch but in a way that complements formal study rather than replaces it.

There are, too, some excellent books describing recent economic history but these can be difficult, if not impossible, in the absence of the building blocks. An account of, say, Alan Greenspan or Ben Bernanke’s time as chairman of the Federal Reserve Board in Washington needs the context of knowing something about monetary policy and how central banks are supposed to operate it. Similarly, trying to judge whether an assessment is fair or unfair of the success of the government’s management of the economy requires a few basic tools.

There was mixed news today from the purchasing managers' surveys for August, with the construction survey showing a drop from 50.9 to 49 while the larger service-sector PMI jumped from 51 to 53.7. This was what Markit, which prepares the data, had to say about services:

"A solid expansion of UK service sector activity was signalled in August as companies benefited from a further rise in incoming new business and continued to make inroads into unfinished work. Capacity was further increased as positive expectations were retained by a significant proportion of service providers.

"However, amid evidence that the operating environment remains challenging, sales and activity continue to grow at below par rates, while confidence was again well below its historical trend level.

"The headline seasonally adjusted Business Activity Index was comfortably above the 50.0 no-change mark in August. Posting 53.7 and rising from July’s 51.0, the index signalled a twentieth consecutive month of growth and its best reading since March."

Under pressure from business bodies, its own backbenchers and just about everybody else, the government has gone into full initiative mode. Though full details are awaited, it appears to comprise:
- up to £50 billion of government guarantees for infrastructure spending, £10 billion of them for housing.
- an easing of planning rules, particularly for housebuilding, but also other developments.
- a "business bank".

There is a strong dose of New Labour about this raft of initiatives. £40 billion of the infrastructure guarantees were announced in July, so only the housebuilding is new.

The government has been in a mess on planning since the Conservatives and Liberal Democrats were in opposition, first proposing what amounted to a Nimby (not in my back yard) charter, before eventually seeing the light on the need to speed planning from the centre. This is just another step along that road.

The "business bank", it seems, is a website that will bring together existing initiatives, not a new bank at all. It remains to be seen if there is anything further.

None of this means some of these things won't be important over the medium term, particularly the infrastructure guarantees. But this flurry of announcements is driven mainly by politics.

Meanwhile, on a day when the EEF came out with a downbeat manufacturing survey, the manufacturing purchasing managers' index actually recorded a reasonable rise, from 45.2 in July to 49.5 in August. That still means the sector is contracting, though only marginally.

According to Markit, which prepares the data: "The downturn in the UK manufacturing sector showed signs of easing during August, following a severe contraction in the previous month. The seasonally adjusted Markit/CIPS Purchasing Manager’s Index rose to 49.5, from 45.2 in July, a four-month high and only slightly below the 50.0 mark that separates expansion from contraction.

"Manufacturing production fell for the second successive month in August, albeit to a much lesser degree than in July. The decline in output was centred on the investment goods sector. Output rose solidly at consumer goods producers, while intermediate goods companies saw a marginal return to growth."

House prices rose by 1.3% in August, their biggest monthly increase since January 2010, according to the Nationwide building society. It followed two successive monthly falls, however, and the best way of looking at the data is that in nominal terms house prices are flat, which is roughly where they've been for the past three years.

Compared with a year ago, prices were down by 0.7%, compared with a 2.6% annual fall in July. More here. The John Lewis Partnership reported an 8.8% year-on-year rise in sales in the week to August 24, which most retailers would give their eye teeth for but is not as strong as its recent performance. The increase for the latest four weeks was 14.9%.

How to square these with the downgrading of the CBI and British Chambers of Commerce forecasts, to -0.3% and -0.4% respectively? Mainly this is a question of arithmetic. Even after the revision of the second quarter GDP figures it would have taken a big rebound in the second half to neutralise the effect of three quarterly declines in GDP. As it is, these forecasts assume growth in the third and fourth quarters.

Perhaps of more concern is that both business organisations predict growth of only a little over 1% in 2013. Their members won't want to invest much on that prospect.

There was no surprise in the fact that GDP was revised up for the second quarter - the first estimate from the Office for National Statistics of a 0.7% fall always looked too low. The surprise is that the revision, to a fall of 0.5%, was not bigger.

We knew the ONS estimates for industrial production and construction were too pessimistic, and each contributed 0.1 points to the revision. But there were also reaons to expect an upward revision to services, down 0.1% on the quarter, following stronger retail sales in June.

As it is, the economy appears to have been flat in the second quarter after the bank holiday effect is taken out. But these are still early stage numbers. Compared with a year earlier UK GDP, not adjusting for any bank holiday effect, was down 0.5%, similar to the 0.4% fall for the EU and eurozone. More here.

Both the Institute for Fiscal Studies and the Office for Budget Responsibility will have something to say on the public finances later and I imagine they will say it is too early to draw conclusions on the full-year outturn from the numbers for the first few months.

Even so, there is an overshoot, both for July and the first four months of the fiscal year. In July public sector net borrowing was £0.6 billion, compared with a surplus/repayment of £2.8 billion a year ago. Cumulative borrowing, excluding the Royal Mail and other distortions was £11.6 billion higher than in the corresponding period of 2011-12.

This is the Office for National Statistics' explanation:
"The April 2012 net borrowing figures include two one-off transactions. The first is a £28 billion transaction to the Government from the transfer of the Royal Mail Pension Plan and the second is a £2.3 billion transaction to the Government from the closure of the Special Liquidity Scheme ... If the effect of these two one-off transactions is removed from the public sector net borrowing then PSNB ex in the period April to July 2012 would be £47.2 billion, which would be £11.6 billion higher than in April to July 2011."

Other highlights: Public sector net debt was £1,032.4 billion at the end of July 2012, equivalent to 65.7% of gross domestic product (GDP) - this is actually £7 billion lower than at the end of June. 2011-12 borrowing is now back to £125 billion - from £128 billion a couple of months ago.

And current spending is still rising quite strongly: "In July 2012, central government accrued current expenditure was £50.2 billion, which was £2.4 billion, or 5.1%, higher than July 2011, when central government current expenditure was £47.8 billion. For the period April to July 2012, central government accrued current expenditure was £212.5 billion, which was £7.3 billion, or 3.5%, higher than in the same period of the previous year, when central government current expenditure was £205.3 billion."

I'd recommend a glance through the ONS press release, here, and its many footnotes and explanations, for a glimpse of how complicated putting together numbers for the public finances is.

Retail sales volumes rose by 0.3% in July, which was better than expected, after a dramatic upward revision from 0.1% to 0.8% in June. As a result, sales volumes were up by 2.8% on a year earlier, 3.3% excluding automotive fuel.

The July numbers themselves were unspectacular, with clothing and footwear and household goods' sales down on the month, by 1.8% and 1.5% respectively, probably as a result of the bringing forward of summer sales. Food sales were up, however, and sales volumes in the latest three months were up by 0.9% on the previous three months, 1.4% excluding automotive fuel.

The upward revision to retail sales in June should give a stronger service-sector number for the second quarter, alongside better manufacturing and construction. Let us see if it does. More here.

Was there any bad news in today's labour market numbers? if you were looking for it, it would be the fact that pay, rising by 1.6% (1.8% excluding bonuses) is still running below inflation, 2.6%. Or it would be that, at 8%, unemployment is still high, and much higher among young people.

But the big message from today's figures is a positive one, with employment up by 201,000 over the April-June period to 29.48m, which is less than 100,000 below the pre-recession peak. Unemployment dropped by 46,000 to 2.56m, which is 8% of the workforce. Even the claimant count, which is being boosted by benefit changes, fell by 5,900 to 2.56m.

There may have been a small Olympics boost in employment in the figures, but it is absurd to suggest they are solely responsible for the rise. It is possible there has been a slowing in the pace of public sector job cuts (the next set of figures will be distorted by the reclassification of further education colleges).

But overall, the rise in private-sector driven employment and in hours worked - up strongly in the second quarter compared with a year earlier (more than 20m a week) is hard o reconcile with even a flatlining economy. Some can be explained by weakness in the energy sector, which is not closely linked to employment. Overall, though, it is a mystery. More here.

The July inflation figures were a little disappointing, consumer price inflation rising to 2.6% in July from 2.4% in June, while RPI inflation increased more sharply, from 2.8% to 3.2%. After three successive months in which inflation surprised on the downside, this broke the pattern.

We should not be too downhearted. The main reason inflation rose was because prices fell faster a year ago, particularly clothing and footwear, where bad weather brought the summer sales forward this year. Clothing and footwear prices still fell in July, 2.6%, but not as much as in July 2011.

Even so, the consumer prices index only rose by 0.1% between June and July and has increased by just 0.7% since December. Not much inflation there. More here.

Probably more important than the fact that house prices rose by 0.2% in July, and were 3.2% on a year earlier, is that transactions rose by 11% after falling back in Jubilee-affected June. according to the latest LSL-Acadametrics house price index.

The index, the most comprehensive timely measure of the market, notes wide regional variations. According to LSL:

"There is by no means a consistent picture across the country. While the average national price has climbed, less prosperous areas such as Hartlepool have seen prices fall by 8.3% in the last 12 months, reflecting lenders’ caution in areas with weaker local economies where higher levels of unemployment may threaten borrowers’ finances.

“In contrast, London’s market is going from strength to strength. House prices in 10 London boroughs have hit new highs, with Kensington & Chelsea seeing capital gains of 38% since last June. While the figures may be flattered by comparison to last year’s hangover after the introduction of the stamp duty in April on properties worth more than £1m, money is pouring into prime areas from cash buyers and international investors looking to store their wealth in bricks and mortar. As demand from wealthy buyers continues and first-time buyer numbers remain subdued, the gap between the opposite ends of the market remains.” The index is here.

Also announced today. The John Lewis Partnership said department store sales were 22.4% up on a year ago, benefiting from an Olympic uplift.

Apart from the headline widening of the trade deficit in June to £4.3 billion, from £2.7 billion in May - and a second quarter widening to £11.2 billion, from £7.8 billion in the first quarter - the most disturbing aspect of the latest trade figures is the performance of exports.

The Office for National Statistics says export volumes, excluding oil and erratic items, fell by 3.3% in the second quarter, while import volumes dropped by 0.5%. There is clearly a eurozone effect here: in the second quarter the value of exports to the rest of the EU was down by 9.9% on a year earlier, while non-EU exports were up by 9.7%. More here.

The Governor of the Bank of England probably overdid the Olympic analogies but his broad assessment in introducing the August inflation report is a reasonable one. He said:

"A year ago inflation was rising and heading towards 5%. It has now fallen to within touching distance of the 2% target. The big picture in today’s Report is of a further decline in inflation, as external influences fade and domestic cost pressures ease, and a gradual recovery in output. Nevertheless we are navigating rough waters and storm clouds continue to roll in from the euro area.

"Output has contracted in each of the past three quarters, but the underlying picture is probably not as weak as the headline data suggest. The extra bank holiday in June is likely to have reduced output in Q2 by around ½%, an effect that should unwind in Q3. And a large fall in construction output in the first half of the year, which seems at odds with survey data, is unlikely to be repeated. Even looking through these erratic factors, though, the underlying picture is that output has been at best broadly flat over the past two years, and has continually disappointed expectations of a recovery.

"In contrast, the labour market has remained surprisingly resilient in recent months. Private sector employment has grown robustly and unemployment has edged downwards. Although welcome news in its own right, the resilience of employment, combined with the weakness of output, means that productivity growth has been unusually low. That continues a recent pattern of both weak output and productivity growth that is difficult to explain."

The Bank doesn't believe the recent GDP figures and thinks the Jubilee effect alone depressed GDP by around 0.5% in the second quarter - add in a weather effect and you get a flat figures - but has been obliged to revise down its growth forecasts again. Nonetheless it thinks the mechanism for restoring growth - the recovery in real incomes - remains intact. It will, however, be a subdued recovery.

The Bank expects inflation to undershoot the official target for most of the next three years, suggesting the unanticipated squeeze on spending will ease. Buit further monetary stimulus is more likely to come from additional quantitative easing than cutting interest rates. A rate cut from 0.5% was, said Sir Mervyn King, "neither here nor there". The inflation report is here.

The industrial production figures look awful, with a drop of 4.3% on a year earlier in both industrial production and manufacturing and falls of 2.5% and 2.9% respectively on the month. The extra June bank holidays were, however, a big factor and the 0.9% quarterly drop in both measures was less than the 1.3% the Office for National Statistics had feared, implying a 0.1 point upward revision in Q2 gross domestic product. More here.

After the manufacturing purchasing managers' index earlier in the week - sharply down - and that for the construction sector, surprisingly up, today we had the service sector reading.

It fell from 51.3 to 51, so still expanding, but at a slower rate. However, according to Markit, which prepares the data:

"The Markit/CIPS PMI surveys for July collectively signalled the weakest economic performance since April 2009, a downturn which can only in part be attributed to temporary factors.

"Markit’s all-sector PMI fell for the fourth month running in July, down from 51.1 in June to 49.5, signalling the first monthly fall in output since April 2009. The decline was led by the sharpest drop in manufacturing output for three years, while growth of services activity was only modest and the weakest since heavy snowfall disrupted business in December 2010. Construction activity also rose only moderately, but the increase was at least an improvement on the downturn seen in June.

"At 49.5, the current level of the PMI is historically consistent with gross domestic product stagnating at the start of the third quarter. The average of 52.2 seen in the second quarter is consistent with GDP growing by 0.1% while the first quarter average of 54.8 signalled GDP growth of 0.5%."

Note that Markit continues to challenge the recent GDP numbers.

The Markit purchasing managers' index for UK manufacturing in July made for depressing reading, with a drop from 48.4 in June to 45.4 in July. As Markit put it:

"Output and new orders both contracted sharply during July, as companies faced weaker demand from domestic and export clients. The decline in production was the steepest for 40 months, with contractions recorded in both the intermediate and investment goods sectors. In contrast, output rose slightly at consumer goods producers."

How did it compare with elsewhere? The Eurozone manufacturing PMI was at a 37-month low of 44 in July, down from 45.1 in June. The US index was stronger, at 51.4, down from 52.5 in June. The global manufacturing PMI was 48.4, down from 49.1 in June. So manufacturing is struggling everywhere, but particularly in the UK and the Eurozone.

The Office for National Statistics has pulled together its material on the household sector, showing that real household income per head fell by 0.6% in the first quarter, to its lowest level since the second quarter of 2005. We've made no net progress for six years, in other words.

The ONS says this is mainly due to the impact of high inflation on real incomes, which offers a degree of hope if inflation continues to fall. In the meantime, household actual spending per head in the first quarter was its second lowest, in real terms, since the third quarter of 2003.

Wealth, however, is slowly recovering. Most people focus only on household debt, but household assets - physical and financial - are also important. Net household wealth rose strongly in 2009 and 2010 and edged up by 0.1% in 2011, to around £7 trillion. In cash terms, we've never been wealthier. More here.

One way of trying to solve the mystery of the extreme weakness in construction this year - the main drag apart from special factors on the GDP numbers - is to dig deeper into the statistics.

Paul Bivand of the Centre for Economic and Social Inclusion (usually known as Inclusion) has done this by looking at the detailed employment numbers for the construction sector. They show that while employment demand weakened significantly at the start of the year, supporting the weakness of production at that time, it has since strengthened significantly.

There may be, as Bivand says, a rational explanation, but just as likely is that the construction figures used in the GDP calculations are implausibly weak. His note is here. One thing we do know is that the construction revisions are extraordinary. An initial estimate of a 4.7% drop in the sector's output in the first quarter of 2011 has now become a 0.5% rise.

The Office for National Statistics never loses its capacity to surprise. Against expectations of a 0.2% quarterly fall in GDP in the second quarter, its estimate is for a 0.7% fall. Some of that is due to the extra bank holiday but it seems likely there would have been a contraction even without that.

These are bad numbers, with little in the way of optimism. The economy is now smaller than wne the coalition came to power and Labour will have a field day. They are even harder to square with the buoyant employment figures.

Are they credible? Nobody doubts the economy is weak but the detail of these numbers should give some pause. The ONS has not really got its collective head around construction, and its figures, a 4.9% fall in the first quarter and a 5.2% drop in the second, suggests a sector collapsing at a 20% annual rate after being pretty flat on a quarterly basis during 2011. That does not make much sense. More here.

After two awful sets of numbers for the public finances, the June figures were not as bad. Yes there was an overshoot compared with a year ago - public sector net borrowing was £14.4 billion compared with £13.9 billion in June 2011 - but this was smaller than in April or May. So things might be coming back on track.

The current budget deficit was £13 billion, compared with £12.4 billion a year ago. So far this fiscal year underlying borrowing on this basis has been £41.6 billion, compared with £35.1 billion in the corresponding period of 2011-12. Public sector net debt is £1,038 billion, 66.1% of GDP.

According to the ONS: "In June 2012, central government accrued current receipts were £40.9 billion, which was £1.4 billion, or 3.6%, higher than in June 2011, when central government current receipts were £39.5 billion."

In June 2012, central government accrued current expenditure was £52.4 billion, which was £0.4 billion, or 0.8%, lower than June 2011, when central government current expenditure was £52.8 billion."

Interestingly, the ONS has revised down the 2011-12 borrowing outturn. It is now back down to £125.7 billion, just below the Office for Budget Responsibility's forecast of £126 billion, having been revised up to £128 billion a month ago. The figures are here.

The IMF's detailed Article IV consultation document on the UK economy is interesting, not least because of the ground it covers. Those who think the Office for Budget Responsibility went too far in revising down the estimate of Britain's output gap - spare capacity - will find comfort in the fact that the IMF agrees.

The IMF thinks the output gap is 4%, the OBR 2.7%, The difference between the two numbers translates into a smaller amount of future fiscal tightening that will be needed to eliminate the structural budget deficit.

On fiscal policy more generally, the key point will be reached in early 2013. If growth fails to pick up, then the planned fiscal consolidation for next year, 1.5% of GDP, should be cut back. The IMF thinks this could be achieved as long as the government puts in place credible deficit-reduction measures for the longer-term such as accelerating the increase in the state pension age.

The IMF says fiscal policy was too loose before the crisis, which contributed to the present difficultiues, though most of Britain's fiscal problems arise from the impact of the crisis. It thinks the government should look at scaling back public sector pay and welfare entitlements to make room for more infrastructure spending.

Is it an open call for a Plan B? Not yet, and what comes over strongly from the document is the extent of uncertainty over the effects of fiscal policy. It backs more quantitative easing, lower interest rates and credit easing measures. Its thoughts on fiscal policy are in two parts:

"Budget neutral reallocations should be undertaken to make room to increase
government spending on items with higher multipliers (e.g., public investment)."

And: "The planned pace of structural fiscal tightening will need to slow if the recovery fails to take off even after additional monetary stimulus and strong credit easing measures."

The report is here. You get the sense that the IMF is using the example of the UK to forge a new and more rounded version of the Washington consensus. Some of the things it is concerned about, for example the hysteresis effects of high unemployment (essentially people who don't work losing the ability to work productively) suggest a more stagnant labour market than recent figures have suggested. If they apply to Britain, they apply to other countries in Europe even more.

By including petrol and fuel sales in the retail sales statistics, the Office for National Statistics has introduced a volatility into the numbers that was not there before. This has been particularly the case in recent months, when fuel sales were affected by panic buying over fears of a tankers drivers' strike.

So retail sales volumes including fuel rose by just 0.1% in June, following a 1.5% jump in May. In April they fell sharply, so are down by 0.7% in the latest three months. Sales volumes on this basis were 1.6% up on a year earlier in June.

Excluding fuel sales, the traditional way of reporting the numbers, sales volumes rose by 0.3% in June after a 1% rise in May. In the latest three months they were flat in volume - up 0.1% - but down 0.3% in value. That is probably a better guide to high street spending. In June they were 2.2% up in volume terms on a year earlier. More here.

The job market continues to perform well, defying the message from the GDP figures. The employment rate for 16-64 year-olds rose to 70.7% in the March-May period, up 0.3 on the quarter. As before, and indeed as for the past two years, private sector employment growth is greatly outstripping public sector job losses, with an overall rise of 181,000 in 16-plus employment in the latest three months, to 29.35m. Unemployment fell by 65,000 to 2.58m, 8.1% of the workforce.

These numbers speak of a healthy labour market. Hours worked, while affected by the change in timing of bank holidays, continued to rise, to 937.8m in the three months to May, up by 26.8m on a year earlier.

Was there any bad news in these figures? Average earnings are only rising by 1.5%. Strip out bonuses and they are still increasing by only 1.8%. The claimant count rose by 6,100 to 1.6m, 4.9% of the workforce. Normally this would be a harbinger of trouble, but the rate has only increased by 0.2 percentage points over the past year and is being boosted by claimants being shifted from other benefits. More here.

While the labour market continues to point to growth, the Bank of England is reacting to GDP figures it once said it did not believe. It voted 7-2 in favour of £50 billion more quantitative easing at its July meeting, considered £75 billion, and pondered cutting interest rates. The minutes are here.

Whisper it quietly but these were very good inflation figures. Three months ago, after disappointing numbers, Paul Tucker, now in the news for other reasons, suggested inflation would stay above 3% until well into the second half of the year. Instead, it has dropped sharply, including the fall in consumer price inflation from 2.8% in May to 2.4% in June announced today.

Retail price inflation came down from 3.1% to 2.8%. It was the lowest since December 2009, while CPI inflation was the lowest since November that year. According to the Office for National Statistics: "The largest downward pressures to the change in CPI annual inflation between May and June came from clothing & footwear, transport and food & non-alcoholic beverages."

Where it gets very interesting is look at the consumer prices index in June and comparing it with December last year. It has increased by just 0.5%, implying that inflation is running at an annualised 1%. It has further to fall. Is a drop to 2.4% enough on its own to turn real income growth positive? Probably. Though it is still above the official figures for the growth in average earnings, nominal household incomes appear to be rising by more than earnings. So these numbers set things up for a recovery in real income growth.

Of course some will say that falling inflation is a product of weak demand and so is bad news. Mainly, however, it is good news. Energy and commodity prices ran up by too much and some people saw only high inflation on the horizon in spite of weak growth. More here.

When you've had a drop in GDP in the fourth quarter of 2011, a further fall in the first quarter of 2012, and a likely fall in the second quarter, the growth arithmetic for 2012 as a while becomes very difficult. The Ernst & Young Item Club thinks it will leave us with zero growth this year, while the International Monetary Fund's latest figure, just out, is 0.2%.

Next year, the IMF says, growth will be 1.4% (the same as Germany). In each case, growth has bene revised down by 0.6 percentage points compared with the IMF's spring projections. These are disappointing figures, though are not being used by the IMF to push a Plan B, and won't be used by the government for that either.

The bigger picture for the world economy is less bad than feared, though these are just forecasts. Global growth for this year is trimmed fractionally to 3.5%, next year from 4.1% to 3.9%. More here.

To what extent is the Funding for Lending (FLS) scheme genuinely intended to get more credit into the economy, and to what extent is it just a way of getting cheap funding to the banks? The surprise in the announcement is that the banks only have to maintain their lending to benefit from the cheap funding. And there is no guarantee that they will pass on lower funding costs to borrwers.

This is what the Bank says: "The Bank of England and HM Treasury are today announcing the launch of the Funding for Lending Scheme (FLS). The FLS is designed to boost lending to the real economy. Banks and building societies that increase lending to UK households and businesses will be able to borrow more in the FLS, and do so at lower cost than those that scale back lending.

"The introduction of the FLS occurs against the backdrop of a euro-area debt crisis which has revealed severe vulnerabilities in the European banking system and has led to a marked deterioration in the outlook for the UK economy over the past twelve months. In spite of the policy actions of the authorities, the flow of credit through the banking system – which households and many businesses necessarily rely on – has remained impaired. The FLS is designed to tackle this problem by reducing the price at which banks and building societies are able to fund themselves."

And here is its explanatory document.

The latest LSL-Acadametrics house price index, published today, shows a strange picture. Normally, low transactions would be associated with very weak prices, but not at the moment. June saw the second lowest monthly transactions since 1995, partly as a result of the Jubilee bank holiday and bad weather, and yet prices just slipped by 0.1% on the month. They were 3% up on a year earlier. Low demand and low supply are producing a curious balance in the market. More here.

One of the points I always make about household debt, which is around £1.5 trillion, is that it is small in relation to household assets, wealth. That is confirmed by the latest release from the Office for National Statistics, which shows that household wealth in the 2008-10 period was £10.3 trillion, up by £1.2 trillion or 12.9% from 2006-8.

Not only is debt a lot smaller than wealth, roughly a seventh, but it is rising more slowly now - if at all. Unlike in America, where household wealth has fallen very sharply, UK household wealth appears to have survived the housing correction.

It is, however, very unevenly distributed. The wealthiest 10% have wealth of £4.5 trillion, while the poorest 10% have wealth of just £8 billion (which is actually a better position than they were in before). More here.

Manufacturing output rose by 1.2% in May and overall industrial production rose by 1%. But what goes up too often comes down, and these increases are likely to be reversed in June. The reason is that the late-May Bank Holiday was moved from May to June, giving an extra day's output in May, but the loss of a day in June.

Will the June drop be big enough to produce a fall in overall industrial production in the second quarter? Probably. Taking April and May together production was only marginally up on its first quarter level. There's a little more leeway in the manufacturing numbers, but not much. Industrial production is likely to be a drag on second quarter GDP.

Even with the May boost, the numbers are not exactly encouraging. May manufacturing output was down by 1.7% on a year earlier, while overall industrial production was down by 1.6%. More here.

It is less obvious that there should have been a distortion in the trade figures, which showed a narrowing of the overall trade deficit from £4.1 billion in April to £2.7 billion in May and a narrowing of the deficit on goods trade from £9.7 billion to £8.4 billion. Some of the despair that followed April's trade figures was overdone. More here.

The Bank of England, as expected, announced a further £50 billion of quantitative easing, while leaving Bank rate unchanged at 0.5%. Economic weakness and concerns about the eurozone, along with falling inflation, triggered the move.

This is what the Bank said about the economy: "UK output has barely grown for a year and a half and is estimated to have fallen in both of the past two quarters. The pace of expansion in most of the United Kingdom’s main export markets also appears to have slowed. Business indicators point to a continuation of that weakness in the near term, both at home and abroad. In spite of the progress made at the latest European Council, concerns remain about the indebtedness and competitiveness of several euro-area economies, and that is weighing on confidence here. The correspondingly weaker outlook for UK output growth means that the margin of economic slack is likely to be greater and more persistent.

"CPI inflation fell to 2.8% in May and is likely to edge down further in the near term. Commodity prices have fallen, which should help to moderate external price pressures. And pay growth remains subdued. Given the continuing drag from economic slack, that should ensure inflation continues to ease into the medium term."

The full statement is here.

It would have been easy, in a month affected by an extra bank holiday and other disruptions, to expect grim readings from the consumer sector. But house prices rose by 1% in June, according to the Halifax, and were down a modest 0.5% in the latest three months compared with a year earlier. This points to a flattening of prices over the past year: in May 2011 they were falling by an annual 4.2%.

Car sales, mean while, continued to defy expectations, a 3.5% rise in new car registrations in June - to 189,514 - driven by a 9.8% rise in private car registrations. More here.

The UK's manufacturing purchasing managers' index perked up in June, rising from 45.9 to 48.6. But it still points to a contracting sector. This is Markit's summary

"Conditions in the UK manufacturing sector remained fragile in June. Although output volumes recouped some of the losses incurred in the previous month, demand remained weak and job losses continued. On a slightly brighter note, cost pressures fell sharply, with average input prices declining at the fastest pace since May 2009.

"At 48.6 in June, up from May’s three-year low of 45.9, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index® (PMI®) remained below the neutral 50.0 mark for the second consecutive month. Over Q2 2012 as a whole, the average PMI reading (48.2) was the weakest since Q2 2009.

"June saw manufacturing production rise for the sixth time in the past seven months, but only following a solid contraction during May. The underlying outlook remained subdued overall, as companies reported that output volumes had been underpinned by a marked reduction in backlogs of work. In contrast, new order intakes fell further."

There is a lot in the latest GDP release. It does not change the picture much for the latest quarters - that will come later - but it does give us a different picture for the recession, and for earlier years, as well as revising down growth for 2010 and revising it up for 2011.

So the peak-to-trough fall in GDP in the recession is now put at 6.3%, from 7.1%, 2010's growth is down to 2.1% from 1.8%, and 2011 is up from 0.7% to 0.8%. We still have the implausible double-dip, with a downward-revised GDP fall of 0.4% in the fourth quarter of 2011 followed by an unchanged 0.3% fall in the first quarter of 2012.

But these figures are a reminder that the revisions, in both directions, go on for years. 2005, for example, used to be thought of as a weak year for the economy. Today's figures revise it up from 2.1% to 2.8%. More here.

A £17.9 billion budget deficit (public sector net borrowing) for May, £2.9 billion up on a year earlier, the result of strong growth in public spending and weak growth in tax receipts, was not the way it was supposed to be. Borrowing is supposed to be falling but for the first two months of the current fiscal year it is up on the corresponding period of 2011-12.

Why the weakness? The Office for Budget Responsibility, here, notes that the spending numbers can be volatile - until the last months of 2011-12 they pointed to a big undershoot - and that the weakness in income tax receipts is non-PAYE, in other words it has a lot to do with self-assessment. This may be still the backwash of the 50% rate, and efforts to avoid it.

More worrying, past deficits have been revised higher. In round numbers the 2009-10 borrowing peak is now put at £159 billion, falling to £141 billion in 2010-11 and £128 billion in 2011-12. Of that reduction in the deficit, a third, £10.5 billion, reflects a reduction in the current budget deficit. The rest is due to lower capital spending. More here.

A bit of good weather works wonders, and May's weather was not bad. Add in a recovery in diesel and petrol sales following the panic-buying distortion and the retail sales numbers were remarkably good, up 1.4% in volume terms May over April, 0.9% excluding the fuel effect.

Compared with a year earlier, total sales were up by 2.4% on a year earlier, or 3% excluding fuel (the old way of recording retail sales growth). The three-monthly picture probably gives the best guide but that still shows sales excluding fuel up 1.9% on a year earlier. Falling inflation is easing the squeeze on consumers.

The latest employment figures add to the puzzle over the UK economy.There is no way an economy in recession generates jobs at this rate. Employment rose by 166,000 in the February-April period. In the latest quarter there were 205,000 additional private sector jobs, partly offset by a 39,000 public sector fall. Unemployment fell by 51,000 to 2.61m. The only blot was an 8,100 May rise in the claimant count. More here.

Meanwhile, there were four votes for more quantitative easing on the Bank of England's monetary policy committee.

The drop in consumer price inflation from 3% to 2.8%, its lowest since November 2009, was a very pleasant surprise. The Bank of England had expected the rate to remain at 3% or above over the summer. Falling petrol prices are making a big difference, as are lower food prices.

Retail price inflation also fell significantly, from 3.5% to 3.1%. According to the Office for National Statistics: "The largest downward pressures to the change in RPI annual inflation between April and May came from petrol & oil and food. Partially offsetting these was an upward pressure from other travel costs which includes air transport."

Core consumer price inflation, excluding food, energy and tobacco, edged up from 2.1% to 2.2%, though it was running at nearly 3.5% last autumn. So generally good news. Inflation may be starting to act as it should given the weakness of growth. More here.

Growth in the second quarter was an uphill task even before the latest trade and construction figures. The former showed a widening of the overall trade deficit from £3 billion in March to £4.4 billion in April, including a £10.1 billion deficit in goods, up from £8.7 billion.

This was a nasty set of figures, though they look a bit erratic. A 7.1% monthly drop in exports is hard to explain, however much trouble the eurozone is in. More details here.

Meanwhile, the Office for National Statistics came up with another awful construction number, down by 8.5% in April compared with a year earlier. The figures are here.

Mansion House speeches can be dull and content-free but this year's were policy-rich. There were three things to note in tonight's speeches:
- a new "funding for lending" scheme, worth an intended £80 billion, and linked directly to banks' lending into the economy. In return, they will receive official funding at below market rates.
- Regular injections of liquidity of at least £5 billion a month by the Bank, under the emergency facility unveiled last December.
- a broad hint from Sir Mervyn King that more quantitative easing is on the way.

It has been a long time coming but the authorities finally seem to have woken up to the weakness of lending. Why it is happening? Because the banking system has not recovered as hoped and because, said King, the effect of "the euro-area crisis has been to create a large black cloud of uncertainty hanging over not only the euro area but our economy too, and indeed the world economy as a whole".

This is the key passage: "Today’s exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times. Such a scheme could prevent an aggregate deleveraging of the banking system that might hold back recovery. Prior to the crisis, risk premia and bank funding costs were unsustainably low. Today, the black cloud of uncertainty has created extreme private sector risk aversion. Should the public sector, therefore, take upon itself some of those risks? Or put another way, should we collectively take on risks in return for lower compensation than we would demand as individuals? In present circumstances, when private sector spending is depressed by extreme uncertainty, there may be a case for a scheme to underwrite risks which the market itself is unwilling to take.

"What I can say tonight is that the Bank and the Treasury are working together on a “funding for lending” scheme that would provide funding to banks for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending to the UK non-financial sector during the present period of heightened uncertainty. The Bank would lend, as in its existing facilities, against a much greater value of collateral comprising loans to the real economy to protect taxpayers. But the long term nature of the lending and its pricing mean that the Bank could conduct such an operation only with the approval of the Government, as offered by the Chancellor earlier. So such a scheme would be a joint effort between Bank and Treasury. It would complement the Government’s existing schemes, and tackle the high level of funding costs directly. It could, I hope, be in place within a few weeks.

"On liquidity, I want to make clear that the Bank, through its discount window and other facilities, will provide banks with whatever liquidity they require given the prospect of turbulence ahead. Last December, the Bank announced the new Extended Collateral Term Repo Facility under which auctions of short-term sterling liquidity can be held at any time. It is now time to activate that scheme, in the words of the Bank’s Red Book, “in response to actual or prospective market-wide stress of an exceptional nature” over the coming weeks. The Bank will start holding auctions of sterling liquidity with a maturity of six months, and tomorrow morning the Bank will issue a market notice explaining details of the timing and size of these auctions."

King's speech is here.

On the face of it, the National Institute of Economic and Social Research's estimate of 0.1% UK economic growth in the three months to May is mildly encouraging after two successive quarters of falling GDP. 0.1% is, however, neither here nor there.

There are also a couple of caveats. in January NIESR predicted a 0.1% rise in GDP for the fourth quarter, while the Office for National Statistics gave us a 0.3% fall. There was a similar picture in April, and NIESR's estimate of 0.1% growth - and avoidance of technical recession - for the first quarter. Again the ONS's number is now minus 0.3%.

This is not to criticise NIESR. I think its estimates will eventually turn out to be more right than those of the ONS. But it suggests we may have to aim off when it comes to initial official GDP estimates. The other point, of course, is that the three months to May do not include the effects of the Jubilee bank holiday.

The latest estimates were on the back of industrial production figures which were flat in April, though only after a big cold weather boost in utilities (gas and electricity) output. Industrial production still fell 1% year on-yera.

Manufacturing disappointed, falling by 0.7% on the month, and 0.3% on a year earlier. The high watermark for manufacturing was May last year, at which point it had recorded a 7.5% rise from its mid-2009 lows. More here.

Adam Posen, who to be fair has been there before, is continuing to push for monetary policy to be made more effective, notably through the purchase of private sector assets. I agree entirely. It is to be hoped that the pressure for such action does not disappear with Posen's departure from the monetary policy committee.

This is what he said: "I believe that further asset purchases by central banks can improve the economic situation we are now in. I believe that this is particularly true because a major source of our difficulties is an excessive perception of and aversion to risk on the part of investors, even though some rise in that perception and aversion were justified after the boom years. That rise which we see, and the resultant cash hoarding by businesses and portfolio investors, are excessive because some credit problems really are due to illiquidity and to financial market dysfunction rather than to insolvency and indebtedness. We are at risk of the reluctance to invest becoming a self-fulfilling prophecy, as opposed to investment leading us into recovery as in normal
situations. Additional expansionary monetary policy should be effective in breaking this cycle, and must be pursued to meet central banks’ mandated goals.

"I propose that further asset purchases by central banks should take the form of private sector securities for the time being. This will allow more direct targeting of financial sector dysfunctions, and greater impact on liquidity preferring investors’ portfolios, thereby leading to greater impacts on confidence and on the real economy than a similar unit of QE on government bonds. Obviously, not all private sector assets should be eligible for central bank purchases. Central banks should choose those assets which provide the best combination of market depth when functional, importance to the economy, and financial dislocation at present. Securitized bundles of bank loans are in many ways the best kind of private asset to purchase, be they for SME lending in the UK or for mortgages in the US. Where securitized markets of sufficient depth for such assets do not yet exist, as in the UK for SME loans, the central bank should engage in offers to purchase which help make the market for such assets."

The speech is here.

In the event, the Bank of England's monetary policy committee neither added to the existing £325 billion of quantitative easing nor cut Bank rate from its record low of 0.5%. Like the European Central Bank it is waiting to see how events in the eurozone unfold.

Had the construction and service-sector purchasing managers' indices followed last week's manufacturing PMI and fallen sharply, the decision might have been different. But the construction PMI was surprisingly strong at 54.4 and this morning's service-sector PMI held steady at 53.3, better than expected. The Bank will take stock again pending developments in the eurozone and at home.

This is an excellent piece by Kenneth Rogoff, which is in the same territory as my piece for The Sunday Times tomorrow. Rogoff has no time for the debt-ceiling absolutists, who argue for an immediate block on all additional government debt. As he says, it can't be done. But, by the same token:

"If the debt-ceiling absolutists are naïve, so, too, are simplistic Keynesians. They see lingering post-financial-crisis unemployment as a compelling justification for much more aggressive fiscal expansion, even in countries already running massive deficits, such as the US and the United Kingdom. People who disagree with them are said to favor “austerity” at a time when hyper-low interest rates mean that governments can borrow for almost nothing.

"But who is being naïve? It is quite right to argue that governments should aim only to balance their budgets over the business cycle, running surpluses during booms and deficits when economic activity is weak. But it is wrong to think that massive accumulation of debt is a free lunch."

The May manufacturing purchasing managers' index was a shocker, for which there was no obvious warning in other surveys of the sector. This is the summary by Markit, which produces the figures:

"The UK manufacturing sector took a sudden sharp turn for the worse in May. Companies scaled back production and employment as inflows of new business declined at the steepest pace since March 2009, amid rising uncertainty among domestic and overseas clients.

"At 45.9 in May, down from 50.2 in April, the seasonally adjusted Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) fell to its lowest level for three years and below the neutral 50.0 mark for the first time since last November. The headline index fell by 4.3 points over the month, the second-steepest fall in its 20-year history."

It was accompanied by a weak eurozone PMI, which dropped to 45.1 in May from an already weak 45.9 in April. The US manufacturing PMI was stronger, dropping from 56 to 54, but was nevertheless at a three-month low.

Much more disappointing were the US employment numbers, which rose only 69,000 in May after a downward-revised 77,000 in April. This compared with an average of 226,000 in the first quarter. The unemployment rate edged up from 8.1% to 8.2% (the same as the UK rate). More details here The eurozone crisis, it seems, has a lot to answer for.

The first quarter growth figures were revised lower, gross domestic product dropping by 0.3% rather than 0.2%, as the Office for National Statistics had suggested when publishing revised construction figures on May 11. What do we know? A year ago the ONS was similarly gloomy about construction, only to revise it up later. It is impossible to say whether the latest construction numbers will undergo the same fate.

What else do we know? Something odd happened in February. That month manufacturing output fell by 1% while the service sector contracted by 0.6%, in both cases bouncing back the following month. February was an unusually difficult month for the economy, for no obvious reason. This was a leap year, which the ONS adjusts for. I'm sure the February weakness, without which GDP would not have fallen, had anything to do with that adjustment.

The figures also tell us that there was a significant build-up of inventories in the first quarter, which normally tells us that the ONS cannot make the numbers add up. But anyway, the ONS has generated another set of headlines. This time Britain is apparently "deeper" in recession. The figures are here.

Sometimes you get fed up of blaming the weather but there must have been a strong weather effect in the April retail sales figures, down 2.3% on the month as petrol and diesel sales (included in the figures) plunged by more than 13%. The volume of sales excluding fuel fell by 1%.

Both measures were up over the latest three months, by 0.2% and 0.5% respectively. My reading is that the grim April weather deterred people from taking day trips and last-minute short breaks over Easter, a factor that also hit summer clothing sales hard. There's a strange number in the release, which is that the value of food sales was only 0.1% up on a year earlier, at a time of high food inflation. Not so easy to explain. The weather is not, of course, the only factor. Real incomes are being squeezed by high inflation, etc. More here.

Meanwhile, the Bank of England's monetary policy committee (MPC) voted 8-1 to leave the amount of quantitative easing unchanged at £325 billion in May. The one vote in favour of more, £25 billion, was David Miles. Most MPC members saw no case for more QE, though "several" saw it as being finely balanced. The International Monetary Fund, of course, has urged more. The minutes are here.

At last some unexpectedly good news on inflation with a drop in the rate of consumer price inflation from 3.5% in March to 3% in April, its lowest since February 2010. For the first time since the general election Sir Mervyn King, the Bank of England governor, has not had to write a letter explaining why inflation is more than a percentage point away from the target.

Retail price inflation was more sluggish, dropping only from 3.6% to 3.5%, and there may have been some temporary factors behind the CPI inflation fall. According to the Office for National Statistics: "Air transport, off-sales of alcohol, clothing and sea transport were the most significant drivers behind the decrease in annual inflation between March and April." The clothing element could have been the grim April weather, with retailers desperate to unload summer stock.

Even so, better news than expected. More details here.

The public finances are harder to read, distorted by the £28 billion transfer of the Royal Mail pension fuind to the public finances. On the face of it there is an underlying deterioration, with a current budget deficit of £12.4 billion in April compared with £8 billion a year earlier. But there is a pattern of initial borrowing releases being revised. In the latest data, for example, last year's borrowing has come down to £124.4 billion. Public borrowing is not down by a quarter from the peak, as ministers have been claiming (except as a percentage of GDP, where the fall is 26.5%) but it is down by 21%.

This was Sir Mervyn King today, presenting the Bank of England's latest inflation report:

"Output in the United Kingdom has been broadly flat for a year and a half. It remains more than 4% below its level at the start of 2008. Inflation has fallen back sharply from its peak in September last year but remains well above the 2% target, and is more likely than not to be above target until the middle of next year.

"Weak growth and high inflation have been the unavoidable consequences of the financial crisis, developments in global commodity prices, and the need to rebalance our economy. That has been painful for everyone in our society. The challenge facing the MPC is to navigate a route back to normality."

The governor, to be fair, has never exuded confidence about growth and has always stressed the uncertainties about the inflaton outlook. But the 'Waiting for Godot' pattern of the Bank's forecasts - inflation is always gong to come down and growth pick up but not just yet - is developing the pattern of a serial offender.

Today's forecast suggests that the recession of the past two quarters will be revised away and that growth will be around 0.75% this year, picking up to just over 2% next year. Inflation is unlikely to get to 2% before the middle of next year, so may not return to target during the remainder of Sir Mervyn's reign, but should be falling in the early months of the new governor's tenure. As long, that is, as the forecast is right. The report is here.

The labour market numbers, meanwhile, were encouraging, and raised more doubts about the official GDP figures. Employment, driven by an increase in part-time workers, rose by 105,000 in the latest three months. Unemployment dropped by 45,000 to 2.63m, and from 8.4% to 8.2% of the workforce.

Total hours worked rose to 925.8m in the first quarter, from 917.4m in the fourth quarter. Earnings growth, however, remained very weak, up by 0.6% on a year earlier including bonuses, and 1.6% excludng bonuses. More here.

The argument that very low gilt yields mean the government should be borrowing a lot more to fund capital or other spending has been around for a while, though nobody knows how much more borrowing it would take to trigger a flight from gilts and hence higher yields. Now Jonathan Portes of the National Institute has come up with a variation.

He claims to have made an extraordinary discovery, that for the amount of money the government is raising with the pasty tax, which he says is £150 million a year, the government could fund a £30 billion infrastructure programme. He accuses me of being confused for challenging it.

The real interest on index-linked gilts is 0.5%, so £30 billion of funding could be achieved for a "real" £150 million a year, as he says. It looks too good to be true. The pasty tax raises rather less than £150 million a year but let's leave that aside. Let us also leave aside that another £30 billion of index-linked issuance would probably cause market indigestion, almost doubling the amount the Debt Management Office is issuing at present. The question is what is the cost of index-linked funding?

There are two elements to an index-linked gilt. The inflation-adjusted coupon, or interest, and the inflation adjusted redemption value. It is the latter that we should concern ourselves with. It means, for example, that £30 billion of long-dated index-linked gilts issued now will be redeemed for something over £70 billion in 30 years time, using the DMO's 3% inflation assumption (2.75% is consistent with the Bank of England's 2% consumer price inflation target).

So what is the appropriate way to account for this inflation uplift? Is it to take a £40 billion hit in 30 years' time, or is it to allow for it annually? The latter approach has to be the only sensible one, so the first year's inflation uplift of our £30 billion of gilts has an effective cost of £900m, plus the £150m of interest, giving an overall cost of just over £1 billion, similar to the current annual cost of issuing 30-year conventional gilts, and lot of pasty taxes.

The DMO, in calculating nominal yields on index-linked gilts, does precisely this: "The real yields for index-linked issues have been converted into nominal yields using the Fisher Identity and a 3% inflation assumption", it says in its annual report on gilt issuance yields. It means, properly measured, yields on index-linked gilts are close to those on conventionals, as you would expect. There's a nice, and longer, critique, here, which makes some additional points.

You could argue, as Jonathan appears to, that the inflation element doesn't matter, though the persistent inflation overshoots of recent years mean index-linked has been an expensive form of funding. You could argue that the debt could simply be rolled over but that's just passing the buck to future generations.

I apply a simply test to this. If a politician said he could fund £30 billion of infrastructure spending for £150m a year people would accuse him of being a snake-oil salesman. It would be hard to disagree.

There is some small eurozone relief in the fact that German gross domestic product rose by 0.5% in the first quarter, while French GDP was flat. Both countries have avoided the commonly-used definition of recession: two consecutive quarters of declining GDP.

This is in contrast, of course, to Britain, where GDP fell by 0.3% in the final quarter of 2011 and again by 0.2% in the first quarter, a number that may be revised down to minus 0.3%. The puzzle is that the purchasing managers' surveys for the UK were stronger than for both France and Germany in the first quarter. Germany's PMIs suggested modest growth, France's something weaker. UK GDP in the quarter, it seems, should have been at least as good as these two economies. Unless, of course, the purchasing managers' surveys are wrong ...

Because of the quality and volatility of the data, the Office for National Statistics had to make heroic assumptions even to limit the fall in construction output in the Q1 gross domestic product figures to 3%. Now it has more data, the fall is 4.8% and the effect will be to knock a further 0.1 points of growth in GDP in Q1, so that the initial 0.2% fall is likely to be revised to 0.3%.

It might not, if the service sector is found to have done better than its initially estimated 0.1% rise. Ultimately, the 4.8% drop in construction will also be revisited, though not for a while. A similar fall a year ago was mainly revised away. For the moment, however, we are stuck in the position of weak official data further undermining confidence.

Meanwhile, manufacturers achieved some margin growth. The drop in output price inflation last month from 3.7% to 3.3% was less than expected. Input prices were up by only 1.2% on a year earlier.

There was a welcome 0.9% rise in manufacturing output in March, according to the Office for National Statistics, following a disappointing 1% drop in February. Manufacturing output was flat in the first quarter compared with the final quarter of 2011, still notably weaker than the message from the surveys.

Manufacturing's good work was, however, undermined by other parts of industrial production, particularly energy. The mining and quarrying sector, which includes North Sea oil, was down by 10.2% in March compared with a year earlier, while mild weather meant electricity and gas supply recorded a year-on-year fall of 6.2%.

Overall industrial production fell by 0.4% in the first quarter compared with the fourth quarter of 2011, in line with the number used for the first quarter GDP data. More here.

After the GDP figures, which showed a fall in spite of stronger readings from the purchasing managers' indices, and which showed only weak growth in services, the usefulness of the PMIs as predictors of initial GDP readings has been called into question.

I still think the PMIs, particularly for manufacturing and services, tell us a lot about underlying private sector activity, and where the GDP numbers will eventually end up, though not for a long while.

The latest suggest some moderation in activity in April, with the service sector PMI down 2 points to 53.3 and the composite measure (manufacturing, construction and services) down to a five-month low of 53.2, from 55 in March. Another weak GDP reading was already expected for Q2 and this will have done nothing to change that view.

Meanwhile, Nationwide said house prices fell by 0.2% in April and were 0.9% down on a year earlier.

My reaction to Sir Mervyn King's Today programme lecture on Wednesday evening was that it was a mainly a BSE (blame somebody else) speech. Chris Giles of the Financial Times said it was a "theyaculpa" rather than a mea culpa speech. Is that fair?

There were two main messages (a) the Bank should have warned more about what was happening (b) there was no boom before the bust. The Governor, in an interview this morning on the Today programme, says the Bank takes its share of the blame. Judge for yourself. The lecture is here.

The construction industry is sceptical about the sector's purchasing managers' index, which is a pity. The latest index, for April, shows the index down from March's 56.7 to 55.8, but still well above the 50 level consistent with expansion. March's index was a 21-month high, in contrast to official figures showing falling output.

In Europe, meanwhile, the manufacturing PMI dropped to a worrying 34-month low of 45.9 in April. Even German manufacturing output is in decline, with an index of 46.2.

Last weekend I wrote about the weakness of bank lending. Today's figures show a £1.4 billion increase in lending to individuals in March, compared with £1.3 billion on average for the previous six months. Mortgage approvals rose to 49,860 from 49,029 but were below their previous six-month average of 53,103.

Lending to businesses continues to fall, dropping by £1.7 billion in March, for a 3.4% annual fall. There was stronger growth in the adjusted M4 measure of the money supply, up an annualised 6.4% in the latest three months. But this is still a mixed monetary bag.

After the purchasing managers' surveys flagged up decent growth in the first quarter, maybe we should not be too worried about a drop in the manufacturing purchasing managers' index from 51.9 in March to 50.5 in April. Nonetheless it is disappointing, suggesting a weakening of growth momentum.

Anyway, I have been looking at the GDP figures again. Why is growth so weak? Is it the cuts? Take a look at P23 of the quarterly national accounts, here (click on the pdf), and you see that it would be wrong to blame government "cuts" for reducing growth.

In 2010 government spending made a small contribution to growth, 0.3 percentage points, while in 2011 it was zero. That is not quite the full story. Labour's boost to public sector capital spending made a contribution to growth in 2010, though the deep capital spending cuts it bequeathed to the coalition reduced spending in 2011.

The biggest contribution to growth in 2010, however, was stockbuilding, which can only ever be a temporary factor. There were two big shifts between 2010 and 2011, one good, one bad. The good one was that net trade, having subtracted 0.5 points from growth in 2010, contributed a full percentage point in 2011.

The bad was that consumer spending, having contributed 0.8 points to growth in 2010, subtracted 0.7 points in 2011. Some of that was the VAT and National Insurance hikes. Mostly it was the real income squeeze from other sources of high inflation.

Read the Office for National Statistics GDP press release, here, and it all looks very straightforward, Growth has disappointed throughout 2011 and into 2012, with growth rates through 2011 of 0.2%, -0.1%, 0.6%, -0.3% and -0.2% respectively, as set out on page 2 of the release.

But then look on page 7 of the release and, as Economics UK reader Sean Fear points out, you get a very different picture. Add up the contributions to GDP growth and, while the latest two quarters are unchanged, the first three quarters of 2011 look as if they should be 0.6%, 0.1% and 0.7% respectively, a somewhat stronger picture. A similar message emerges in Table B1 on the last page of the release.

There is an ONS explanation, and this is it: "The link between GVA and GDP is shown below:
GVA at basic prices (by industry) plus Taxes on products (e.g. VAT) less Subsidies on products (e.g. transport) equals GDP at market prices (for the whole economy). The above applies to both current prices and in volume terms.

"At the Month 1 stage, the headline GDP measure in volume terms is based on the Output approach (proxy to Production) to measuring GDP. This in reality is based on the aggregation of all industries' GVA. The whole economy GDP estimate implicitly assumes the movement in volumes of taxes and subsidies is in line with the underlying movement in volume terms for GVA (for the whole economy). In terms of the industry contributions to growth, this is in reality applied to whole economy GVA and not GDP, generating minor differences.

"At Month 2 and Month 3, the headline GDP measure in volume terms is based on all three approaches to measuring GDP - Production (i.e. output), Income and Expenditure. In achieving the headline estimate, there is a statistical discrepancy applied to both the Income and Expenditure approaches. The values of the statistical discrepancy may differ on Expenditure compared with Income. At Month 2 and Month 3, the industry contributions to growth are evaluated against GVA as laid out in Annex A of the respective release."

The ONS has promised to change the presentation of some of the data to clear up the confusion. Looking back on the data for some of those earlier quarters, it looks as if the expenditure measure of GDP is a lot weaker than the two other measures.

As feared, the Office for National Statistics has done it again. A 3% drop in construction output in the first quarter and growth of just 0.1% in the service sector has pushed Britain back into technical recession. Gross domestic product fell by 0.2% in the first quarter, following a 0.3% drop in the fourth quarter of 2011.

The fall in GDP in the first quarter, foreshadowed by the Bank of England when it described the ONS figures as "perplexing", is indeed puzzling. To be fair to the ONS, it has worked quite hard to prevent the construction figures from dragging down the GDP number by even more, setting out a range of assumptions on what might have happened to the sector in March. It could easily have slotted in a bigger negative number for construction.

But 0.1% growth in the service sector looks implausiably weak (as, despite the ONS's transparency does construction). It leaves egg on the faces of the Office for Budget Responsibility, Bank of England and government. The figures will be revised, but not for a while. In the meantime, the risk is of a hit to confidence. More on the figures here.

Shortly after the figures were released the CBI reported that business confidence among manufacturers was at its highest for two and a half years. Until the surveys are reflected in the official data, however, that looks like small comfort.

The Office for Budget Responsibility can be proud of its budget forecast of £126 billion of public sector net borrowing for 2011-12. Official figures from the Office for National Statistics show it came in exactly at that level, down from £136.8 billion in 2011-12. This was in spite of a larger-than-expected figure of £18.2 billion in March alone.

The ONS revised down its February figure, released on the morning of the March 21 budget, by more than £2 billion to £12.2 billion. The high March figure, the product of weak tax revenues and strong spending, may suffer the same fate. That means, while the OBR is right now, future revisions are likely to see the 2011-12 figure shaved. The government would appear to be in track to get borrowing down to £120 billion in 2012-13 (£92 billion when the one-off Post Office payment is taken into account). More here.

Two widely-watched measures of what is happening in the construction industry are provided by the Office for National Statistics and the Markit purchasing managers' index (PMI). as far as the industry is concerned, the former is showing too weak a picture - particularly for recent months - and the latter far too strong. This is the Construction Products Association's latest assessment, weak but not collapsing:

"Construction output is forecast to fall by almost 3% this year, according to the latest forecasts published today by the Construction Products Association, as the cuts to the capital budget announced in the CSR start to have a real impact on industry activity. Construction output is forecast to remain flat in 2013 before private sector work strengthens and drives a return to growth in 2014.

"Commenting on these forecasts, Michael Ankers, the Chief Executive of the Construction Products Association, said: ‘It seems inevitable that construction output fell in the first three months of this year and this will have had a significant impact on the rate of GDP growth at this time. With new orders for construction falling significantly at the end of last year, 2012 is going to be a difficult year for the construction industry with output forecast to fall by almost 3%.

"The construction industry accounts for nearly 9% of GDP and therefore is going to be a major constraint on growth in the wider economy over the year ahead. ‘Public sector spending cuts are now beginning to bite and with the exception of a steady recovery in the private housing market, where starts are forecast to increase by 5% this year and 11% next, the private sector is pretty subdued. What is particularly disappointing is the weakness of the private commercial market where output is expected to decline both this year and in 2013. Office development is slowing down and private finance for social infrastructure is unlikely to make a rapid comeback. ‘One bright spot in the forecasts is investment in infrastructure, particularly rail and energy where growth is expected to increase in each year from now until 2016.'

Meanwhile Danny Alexander, the Treasury chief secretary, has asked government departments to identify 5% of cuts to cover unforeseen circumstances. Damian McBride, formerly Gordon Brown's spin doctor, has suggested that when it comes to budgets there are no new ideas, only recycled ones. That is certainly true of this one. I've heard it before from previous chief secretaries.

The fuel panic had an impact on the official retail sales figures and, by implication, should have provided a boost to first quarter gross domestic product. Overall retail sales volumes rose by 1.8% between February and March and were 3.3% up on a year earlier. The office for National Statistics says that part of that reflected the rush to buy petrol and diesel ahead of the feared tanker-drivers' strike.

Whether or not there was panic buying of other goods, or whether it was just the favourable weather, but sales excluding fuel also rose strongly, by 1.5%, and were 2.8% up on a year earlier. The retail sales deflator rose from 2.4% to 2.5% in March compared with February, in line with the small rise in consumer price inflation reported earlier in the week.

Overall, a distorted but reasonably strong set of figures. More here.

Labour market statistics were better than expected, supporting the idea that recent growth in the economy has been stronger than official figures have suggested. These are the highlights:

"The employment rate for those aged from 16 to 64 was 70.4 per cent, up 0.1 on the quarter. There were 29.17 million people in employment aged 16 and over, up 53,000 on the quarter."

"The unemployment rate was 8.3 per cent of the economically active population, down 0.1 on the quarter. There were 2.65 million unemployed people, down 35,000 on the quarter. This is the first quarterly fall in unemployment since the three months to May 2011."

Some people are confused about the different measures of unemployment. The Labour Force Survey measure, now 2.65m, is not benefit-related - it measures people who declare themselves to be unemployed and available for work, whether in receipt of benefit or not. That is why it includes some 300,000 full-time students.

The claimant count rose by 3,600 to 1.61m, though data revisions mean it has been reported at around the 1.6m level for some months. It is also boosted to an extent by the shift of some people from other incapacity benefit to jobseeker's allowance.

Pay growth, however, remains very subdued: "Total pay (including bonuses) rose by 1.1 per cent on a year earlier, down 0.2 on the three months to January 2012. Regular pay (excluding bonuses) rose by 1.6 per cent on a year earlier, unchanged on the three months to January 2012." The release is here.

Also, the Bank of England's April minutes showed puzzlement over weak official statistics versus stronger surveys, a fear that those official statistics will show three successive quarters of declining GDP and a single vote (David Miles) of £25 billion for more quantitative easing. The minutes are here.

The Bank of England thought a drop in inflation to the "low threes" by March was a dead cert, so the rise from 3.4% to 3.5% in consumer price inflation is a disappointment, only partly compensated for by an accompanying drop in retail price inflation from 3.7% to 3.6%. The fall in both measures of inflation is essential if the growth in real incomes is to be restored, thus supporting spending.

According to the Office for National Statistics: "The largest upward pressures to the change in CPI annual inflation between February and March came from food (particularly fruit, bread & cereals and meat), clothing and recreation & culture. The largest downward pressures to the change in CPI annual inflation between February and March came from electricity, gas & other fuels and transport.

The annual rate of RPI inflation was last lower in December 2009. "The largest downward pressures to the change in RPI annual inflation between February and March came from motoring expenditure and fuel & light. Partially offsetting these were upward pressures from food and clothing."

The Bank can no longer blame George Osborne for high inflation. CPIY, excluding indirect taxes, is 3.5% and on a rising trend, while CPI at constant tax rates is just below it. More here.

It is unfortunate that the Office for National Statistics chose to release two of its hard to interpret sets of data on the same day, The producer price numbers are easiest to interpret. They show the pressure from rising energy and commodity prices persists, with industry's raw material and fuel costs up 1.9% in march. But, because of helpful base effects, the annual rate dropped from 7.8% to 5.8%.

Base effects also helped convert a monthly rise of 0.6% in output prices into a drop in the annual rate from 4.1% to 3.6%, its lowest since January 2010, and there was unequivocal good news in a tiny 0.1% monthly rise in "core" output prices. More here.

More difficult are the construction figures, not least because they are not seasonally adjusted. in February they were 4.6% down on a year earlier, though in December-February they showed a 0.2% increase on a year ago. Even so, it appears that construction will need to show a spectacular March rise if the sector is not to reduce gross domestic product in the first quarter. More here.

Just when we were getting more optimistic about the economy along comes the Office for National Statistics with its February industrial production data. Manufacturing output officially fell by 1% in February, though overall industrial production rose by 0.4% on the back of a cold weather boost to energy output.

These were disappointing numbers, after a week in which manufacturing, services and construction purchasing managers' indexes (for March) were strong, and after the February manufacturing PMI pointed to growth. As it stands, it will be a challenge for manufacturing to make any contribution to growth in Q1 and the risk is that overall industrial production will be pulled down by the good March weather. More here.

Following yesterday's good purchasing managers' index for manufacturing, up from 51.5 to 52.1, the British Chambers of Commerce quarterly survey is also cautiously upbeat. While warning that growth is slow, the BCC cites an improvement in Q1 over Q4 2011.

It says: "Manufacturing home deliveries up 12 points to +12%, and home orders up 19 points to +6%. In the service sector, the home deliveries balance rose eight points to +10% and the home orders balance is up 16 points to +7%.

"The manufacturing balance for export deliveries rose 12 points, to +24%, and for export orders increased 15 points, to +20%. - The service export deliveries balance rose six points, to +16% and for export orders the balance is up 13 points, to +12%." More here.

In its most recent e-mail poll, completed on 27th March, the Shadow Monetary Policy Committee (SMPC) decided by six votes to three that UK Bank Rate should be held at ½% when the official rate setters meet on Thursday 5th April. The three dissenters all wanted to raise Bank Rate by ¼%. In addition, two of the members who voted to hold in April had a bias towards rate increases in the near future.

Several of the ‘hikers’ also had a bias towards further rate increases subsequently. This represented the most hawkish position that the SMPC had adopted for some time. It reflected the views that: 1) money-market rates were so far above Bank Rate that the latter risked irrelevance; 2) some normalisation of Bank Rate up to, say, 2% was appropriate now that conditions had partly stabilized, and 3) the improved euro-zone situation provided a possibly, short-lived window of opportunity to normalise UK borrowing costs.

The predominant reason why most SMPC members voted to hold Bank Rate in April was the view that there remained ample spare resources in the British economy, despite some tentative signs of recovery, together with concern that broad money was still growing too slowly to sustain any upswing. There was a general view that the macro-economic impact of the 21st March Budget was broadly neutral, and did not warrant a change in rates.

However, committee members questioned the desirability of adding further complications to a tax system that was already of baroque complexity and needed wholesale simplification and reform instead. There was a further concern that the Chancellor’s deficit forecasts were too optimistic and that a future British sovereign debt crisis could not be precluded if fiscal credibility was lost.

Comment by Tim Congdon
(International Monetary Research)
Vote: Hold Bank Rate.
Bias: To hold, while employing QE to maintain steady monetary growth.

The regulatory attack on the UK’s banks has been under way for over three years now and has resulted in a radical transformation in their balance-sheet structures. The key policy-making individuals and officials (i.e., the Governor of the Bank of England and the then Chancellor of the Exchequer downwards) did not realise in late 2008 that substantial shrinking of banks’ risk assets and massive recapitalisation would lead – if not offset by some other force or forces – to a huge contraction in the quantity of money and, hence, to a very severe recession or even a depression. Am I saying then that the key individuals were, to put it mildly, pretty misguided? Yes, that is exactly what I am saying. They might protest that my argument depends on the validity of the monetary theory of national income determination. So indeed it does. They might go further and claim that the monetary theory of national income determination is controversial. Well, that is their problem. My view remains that they were very misguided. UK officialdom’s attempts to force banks to cut the size of the balance sheets by a quarter or a third, in only a few years, has to be condemned as crazy; the equivalent in monetary policy of such historical madness as the Charge of the Light Brigade.

In practice, as the recession gathered pace in late 2008 and early 2009, UK officialdom responded not only by slashing short-term interest rates to virtually zero, but also by operations (which became known as ‘Quantitative Easing’ or ‘QE’) that had – as an intended direct effect – an increase in the quantity of bank deposits. So the quantity of money did not fall as drastically in 2009 as it would otherwise have done. Macroeconomic conditions were certainly far better by early 2010 than had been expected a year earlier, and remained not too bad in the rest of 2010 and 2011. UK banks now have lower risk assets, and far more cash and government securities, than in mid-2008. These assets are matched on the other side of the balance sheet by roughly the same level of sterling deposits, but higher capital.

In late 2011, fears were expressed that the UK economy was about to enter another downturn. The latest data do indeed show that in the closing months of 2011 banks jettisoned a significant quantity of risk assets. Without offsetting action, the quantity of money would almost certainly have dropped. In its wisdom the Monetary Policy Committee (MPC) decided in October to initiate another £75 billion of asset purchases under the QE label. That ought to have resulted – over the next three or four months – in additional bank deposits being created as the Bank of England bought gilts (mostly, although not entirely) from non-banks. The monetary effect of official operations of this sort can be identified in the credit counterpart arithmetic in the category ‘public sector contribution to money growth’. The public sector contribution to money growth was high in October itself, but then surprisingly small in November and December. However, we now have the January figure and everything has gone according to plan. The public sector contribution to M4 growth in the four months to January was £53.4 billion, not exactly £75 billion, but allowance needs to be made for purchases from banks, purchases from foreigners, etc.

Although banks continued to rid themselves of assets that they deemed non-core, the M4ex money measure rose by 1.9% in January. The three-month annualised rate of growth – which was negative in December – bounced back to a perfectly satisfactory 4.2% in January. Meanwhile the UK’s broad money measure remains in positive territory on the annual rate of change, with the January figure being 2.9%. With non-energy prices pressures weak and short-term interest rates at more or less zero, numbers like these are consistent with a general absence of balance-sheet strains throughout the economy. The stock market has indeed had a good start to 2012. Last autumn’s QE programme deserves a small pat on the back.

But, what happens from here on? The £75billion of QE announced last autumn seems to have been fully justified by the weakness of lending to the private sector, as the banks cut down on assets that they did not really want (or, at any rate, that under regulatory pressure they felt obliged to relinquish). What happens in the spring of 2012 if banks keep on cutting back heavily on their risk assets? The closing months of 2011 saw severe weakness in bank lending to ‘intermediate other financial corporations’, i.e., the quasi-banks established a few years ago partly as a device to evade regulatory capital ratios. However, lending to genuine non-banks has been growing in the last two or three months at a welcome annualised rate in the low single digits. It is possible that the total stock of bank lending to the private sector may contract further in the next few months, as banks make their final effort to comply with the regulatory push for extra safety, higher capital/asset ratios, less inter-bank funding and so on. However, the rate of contraction should be less than in 2011. Meanwhile the MPC has shown itself to be rather trigger-happy with regard to QE. Indeed, two MPC members wanted the present round of QE operations to be £75 billion instead of £50 billion.

A reasonable central view is that broad money will grow in 2012 even on present policies (i.e., without extra QE), although not rapidly. No doubt banks want to expand their balance sheets again, not least because of the endless (if rather silly) barracking they receive in the media for not doing enough new lending. The money growth rates seen in the mid-noughties (of 10% a year or more) are not on the horizon, but in 2012 the UK could enjoy broad money growth of 3% to 5% a year, the highest rate for five years. An annual growth rate of 3% to 5% in M4ex balances (i.e., in the money balances of the non-bank private sector) ought to be consistent – given the current low inflation and zero interest rates – with satisfactory or even very satisfactory macroeconomic outcomes. My corresponding policy preference is for Bank Rate to stay at ½% and for the Bank of England to vary the quantity of QE in order to sustain M4ex growth in the mid- single digits, at an annualised rate. For the first time since early 2008, it is conceivable that my bias in, say, early 2013 will be to tighten. Nevertheless, and for the moment, my bias is ‘no change’.

Comment by Jamie Dannhauser
(Lombard Street Research)
Vote: Hold Bank Rate and QE.
Bias: To expand QE if situation deteriorates once again.

Despite much fanfare and media hysteria, the Budget has done little to alter the macroeconomic outlook. There was plenty of micro-tinkering but no change in the Coalition government’s overall fiscal strategy. By the end of this parliament, the government plans to have cut real departmental spending (broadly speaking, total managed expenditure net of social security payments, debt interest and other transfer payments) back to fiscal 2003-04 levels. Between 2009-10 and 2016-17, the expected annual average reduction is 2.9%. This is the tightest spending settlement in the post-war period by some margin. The only comparable period of real-terms cuts in departmental spending was 1974-75 to 1988-89. Over these fourteen years, real departmental spending was cut by 1.5% per annum on average. The current consolidation effort is almost identical in overall size – at least, in terms of departmental spending – but will progress at twice the rate.

Whether this is administratively feasible, economically desirable or politically achievable remains to be seen – history does not suggest departmental spending cuts on this scale can be achieved over such a short time-frame. Moreover, and in a world of excessively leveraged private sector balance sheets, the scope for monetary and debt management policy to offset the short-term growth effects of fiscal deflation is more limited than in a normal business cycle. However, it is absolutely right for the government to be talking tough – the UK remains an improbable ‘safe-haven’ in part because of the credibility the government had earned in the markets. The other half of this grand bargain is easy monetary policy. While the government gets its house in order, the Bank of England must limit the pace of private sector deleveraging, and ensuing monetary destruction, by keeping short rates at their effective zero bound and injecting money directly into the private sector via QE.

This is the correct orientation for macroeconomic policy; but it is not without its dangers. For one thing, it is delaying the necessary repair of private sector balance sheets, what Sir Mervyn King has called the ‘paradox of policy’. More importantly, it potentially endangers the credibility of the central bank – Bank of England asset purchases will only continue to stimulate asset prices and economic activity as long as markets remain convinced of the central bank’s anti-inflation resolve.

There has been much discussion about the desirability of QE, both in the media and amongst academics. Recently, hostility towards the policy has been growing. Even on the MPC there are concerns about inflation expectations becoming dislodged. However, the evidence for this is scant, not least in financial markets where five-year forward inflation breakeven rates are below their five-year average. There remains a strong case for continuing to use central bank asset purchases as a means of lowering longer-term interest rates and boosting the supply of broad money. The key judgement is whether the outlook warrants additional QE at this stage.

Inflation is falling back from its recent high point as expected; whether it continues to do so is less obvious. There is a clear upside risk to inflation in the near-term from further disruption to oil supply and the possibility of war in the Middle East. There is also some debate about exactly how much spare capacity there is in the economy and its downward impact on price pressures. On the latter issue, it seems hard to believe that there is not a considerable amount of underutilised resources, especially in the labour market. While the financial crisis will have trimmed the economy’s supply potential, the degree of damage implied by many output gap estimates is implausibly large. The OBR, for instance, has argued that output per hour was only 0.4% below its trend level. With output per hour still 1.1% below its pre-crisis peak, this implies a permanent hit to labour productivity of 10% when compared to a continuation of the 1995 to 2005 trend. Even if it is accepted that excessive borrowing inflated pre-crisis productivity, there is no evidence that there has been a massive deterioration in Britain’s capital stock or a collapse in total factor productivity. Both the data on wage growth and economy-wide prices (e.g., the gross value added deflator) are consistent with plenty of spare resources bearing down on inflationary pressures. Notwithstanding the downward pressure on money demand from record low policy rates and QE, the recent growth in UK broad money is, if anything, still suggestive of inflation settling slightly below its 2% target.

While there is no need to alter the stance of policy at this month’s meeting, the likelihood is that further monetary support will be needed. Despite tentative signs of life in the US economy, the global backdrop to the largest post-war fiscal tightening in Britain is pretty grim. Emerging world growth is slowing after monetary tightening last year. In Europe, the crisis is far from over, even if Mr. Draghi has bought some time. UK output growth is likely to be below historical norms until 2014 at the earliest; growth risks are very much skewed to the downside. The same is true of inflation over the medium-term. This alone would justify an easing bias. Were monetary policy being set on the basis of both monetary and financial stability, that bias would be even stronger.

Comment by Anthony J Evans
(ESCAP Europe)
Vote: Raise Bank Rate by ¼%.
Bias: To raise Bank Rate further but keep lender of last resort facilities on standby in case market conditions deteriorate.

Most economists seem to accept that low interest rates contributed to the causes of the financial crisis, and that at some future point they need to return to more normal levels. The debate is therefore about how soon, and how quickly, they should rise. While the costs of raising too early are well known, it is important to also consider the ongoing costs of low interest rates. Foremost among these are the adverse impact on people on fixed incomes. However, it would be interesting to see more research on the welfare costs of QE given that low gilt yields have also led to high asset prices meaning that for many savers the impact is ambiguous. The Bank for International Settlements (BIS) also points out that low interest rates are delaying balance sheet adjustments and magnifying the credit risks that arose ahead of the crisis. An even less understood cost is the fact that low interest rates send false signals to the market and generate mis-allocations of capital. The longer that interest rates remain artificially low, the more likely that the public use them as a benchmark for what is considered normal. UK households are spending 25% of disposable income on debt repayments, and the low rates available for tracker mortgages entices borrowers to become susceptible to rate rises. Standard variable rates have already begun to rise and further rises need to form part of the expectations of current borrowers. A moderate raise in Bank Rate would serve as a useful warning about the future path of interest rates.

We should not forget that the MPC’s primary aim it to deliver low inflation. Although the rate of Consumer Price Index (CPI) growth is lower than it has been in recent months (down from 3.6% in January to 3.4% in February), this should not be a distraction from the fact that it has been above target for more than two full years. Medium-term inflation expectations may be considered a better focus of policy than historical figures, but there is evidence that this is creeping up. As February’s Inflation Report points out, households inflation expectations are ‘elevated’ and other forecaster’s probability distributions for CPI inflation show that from 2013-2015 the probability of below target inflation is falling, whilst the probability of above target inflation is rising. M4ex broad money continues to grow at a moderate rate and has recovered from the lull that occurred in December 2011.

The policy response of low interest rates and QE have had time to work but the more time that passes the less likely that the economy will respond to aggregate demand stimulus. In short, and if the aim is to boost nominal GDP, it becomes increasingly likely that we will see inflation rather than increases in real output, suggesting that the economy is facing a supply side problem. Given the extent of inefficient labour market regulations, punitive tax rates on middle and high rate earners, an ongoing skills shortage – and the fact that the recent Budget did little to affect the long-term trajectory of these issues – sluggish growth is perhaps the best we can hope for. A lot of the household ‘wealth’ that appeared to evaporate during the crisis might best be viewed as a permanent decline in consumer spending as opposed to an output gap that may be regained. Productivity figures back this up.

It would be wrong to be blasé about the downside risks facing the UK economy, and fears that excessive monetary stimulus will lead to uncontrollable inflation have consistently failed to materialise. However, low interest rates and QE were adopted on emergency grounds and the goalposts as to when this emergency is over continue to shift. If the first quarter growth figures show that the UK is back in recession, this may justify keeping interest rates on hold. However, most forecasters expect growth to return. The risks to the UK economy posed by a Greek default and a disorderly breakup of the Euro have diminished, and those of us who advocated keeping interest rates low to see how the February/March restructuring would play out should now accept that it is time to move forward. Of course, conditions in the euro-zone may worsen, and the threat of further sovereign debt crises remains. However, this will always be the case. The Bank of England must be alert to a possible spike in the demand for money but this should not preclude a moderate raise in Bank Rate.

Comment by Ruth Lea
(Arbuthnot Banking Group)
Vote: Hold Bank Rate.
Bias: To hold Bank Rate (no bias); no more QE and no bias regarding future QE.

The Budget contained no significant surprises, mainly because the policy changes had been so comprehensively leaked. Nevertheless, the acceleration in the cuts in the Corporation Tax Rate, down to 22% by 2014/15 and with an aspiration to reach 20%, was helpful to business. In addition, the reduction in the higher rate of tax, albeit to 45 pence and in April 2013, gives a much needed fillip to retaining internationally mobile senior staff, not least of all in the City. Even though these policy changes will not transform Britain’s economic outlook overnight, they are undoubtedly a step in the right direction.

The March 2012 forecasts from the Office for Budget Responsibility (OBR) were a tad brighter than those released last November. The economic mood has lightened since then reflecting brighter prospects in the USA and a deceptive lessening of tensions within the euro-zone, engineered by the activist European Central Bank (ECB) and an apparently successful conclusion to the negotiations over Greece’s second bailout. Nevertheless, with many euro-zone economies stumbling further into recession, it is all but inevitable that the euro-zone ‘crisis’ will blow up again at some stage. Sanity will only prevail in this beleaguered currency bloc when it is reconfigured and the weaker countries leave and are free to pursue expansionary policies. As far as timing is concerned, I am with Macbeth: “…if it were done when ‘tis done, then ‘twere well it were done quickly.” Unfortunately, it probably will not be.

Despite the falls in CPI inflation in recent months – it was 3.4% in February – the underlying inflationary outlook has worsened since the turn of the year as continuing tensions in the Middle East have driven oil prices up to record highs in sterling terms. The Bank’s projection in the February Inflation Report that CPI inflation would be down to the 2% target by the end of 2012 looks optimistic – though much will depend on the trajectory for oil prices. This doubt was endorsed recently by Spencer Dale who warned that inflation could indeed turn slightly higher than the Bank’s projection this year and next. The MPC’s March Minutes also noted that “seasonally adjusted monthly inflation rates had remained somewhat higher than the inflation target”. The Minutes also contained a discussion on domestically-generated inflation, focussing on wage costs. They noted that, even though the annual total earnings growth was just 2% in 2011 Q4, there were “some early indications that private sector wage settlements had picked up at the beginning of the year”. The latest survey by Income Data Services did indeed suggest that average pay deals had risen to 3% in the three months to January compared with 2.5% in the previous three months.

Money supply growth recovered strongly in January, probably reflecting an unwinding of exceptional year-end balance sheet effects. However, higher bank funding costs are also being passed onto borrowers. Halifax for example recently raised its standard variable rate by nearly 0.5%. There was no major fiscal stimulus announced in the Budget – overall it was fiscally neutral over the forecast period. Furthermore, and given the absence of effective supply-side policies, the Government still seems to be relying on the Bank to provide much of the economic stimulus. The MPC has obliged by sanctioning a very accommodative monetary policy. It should continue to do so. Despite signs that wage settlements are ticking up, there is no need for any change at the moment.

Comment by Andrew Lilico
(Europe Economics)
Vote: To raise Bank Rate by ¼% and do no more QE for now.
Bias: To raise Bank Rate fairly continuously up to 2%, before a pause to review.

With the euro-zone crisis temporarily off the boil, there is a brief window of opportunity for the Bank of England to raise rates. It should seize it. It is well behind the curve on raising rates. The economy is increasingly at risk of a lasting dependency on emergency rate levels. However, the emergency has long since passed, and the economy is now in a sustained period of working through its debt problems. Rates should be raised, not yet to their natural rate (which may have fallen significantly, perhaps to as low as 3%) but at least to a level at which Bank Rate reconnects to the wider monetary transmission mechanism and makes it more credible for banks to seek to fund themselves via deposits. This implies a Bank Rate of around 1.5% to 2%.

Even such a modest rise may drive some households into mortgage default. Some estimates suggest that even millions of households could be placed in distress by a 2% rise in mortgage rates. However, those on tracker mortgages linked directly to Bank Rate have tended to be significant gainers from emergency rate levels. And, to be blunt, if your mortgage has been 0.99% for the past three years and you have not been able to pay down some of your debt, monetary policy is unlikely to be able to save you from here on, even if doing so were morally justified (which it is not). For those on more standard mortgage packages, interest rates have already started to rise, reflecting regulatory requirements, increasing default risk, and funding costs. One way or another, mortgage rates are going up. Those mortgagees who have failed to make their finances more sustainable over the past three years are going to default. Policy makers can (and should) delay this only for so long.

It is, of course, the case that there are other, regulatory pressures on the money supply, created by misguided notions of increasing capital requirements. There is, again, only so much monetary policy can do to offset such huge policy errors elsewhere and only so long that monetary policy is justified in attempting this.

Accompanying the Budget, the OBR downgraded its estimate of the sustainable growth rate for the UK yet again – now to just 0.8%. That means that, in the OBR’s view, the years 2011 and 2012 are not slow-growth years, but instead years in which the economy grew fairly close to its potential. In that context, there is less and less justification for monetary policy to be providing extreme stimulus. The only consequences of maintaining rates so far below the natural rate of interest are: (a) increased inflationary pressure; and (b) mal-investment, induced by artificially low rates. Whether inflationary pressure is realised into inflation in the short-term will depend on how quickly mal-investment is exposed as such. There is every prospect that, in fact, mal-investment will be sufficiently serious that its purging in recession will come ahead of inflationary pressures, so that mal-investment-induced recession beats inflation to the punch, and the first recession we get comes before the high inflation. However, if it does not – and if the economy does start to recover – we can expect inflationary pressures and a need for a, perhaps, steep rise in interest rates to combat inflation, inducing recession either way. The experience of the past five years suggests that if the UK economy is not actually contracting, then inflation rises towards 5%. We shall be lucky if the peak is as low as that the next time. Raising interest rates a little would provide a signal to households that they needed to panic more and, deleverage faster. That would be healthy. If household debt reduces and Bank Rate rises a little closer to the natural rate of interest, then the economy’s rate of growth in potential output will rise and the chances of being able to service our debts over the medium term without resorting to inflation will be improved. We do not need a large spike in interest rates, but it is past time for a tweak. A signal is needed that emergency rates will not be sustained indefinitely.

Comment by Patrick Minford
(Cardiff Business School, Cardiff University)
Vote: Raise Bank Rate by ¼%.
Bias: To raise Bank Rate and halt and then withdraw QE.

The fundamental Budget plan is correct: to cut spending steadily and raise taxes as needed across a broad tax base, until the government’s debt ratio to GDP is stabilised and brought back down towards a less dangerous level of below 60%. The problem has been the lack of policies so far to cut taxes that deter the growth of enterprise. In this year’s Budget the Chancellor, George Osborne, made a start in addressing this problem. However, it is never easy to reform tax when there is no spare money to buy out losers. This is the situation today. So George Osborne is to be congratulated on making some progress in changing the tax system in beneficial ways.

First, he managed to cut the damaging 50 pence top tax rate, which HMRC confirmed was raising virtually no revenue. These calculations are tricky since they depend on assumptions about responses to alternative tax structures. However, based on previous work for the UK, it seems most likely that the 50 pence rate reduced tax revenue because of evasion and negative supply responses, either through net emigration or by reduced labour supply. HMRC’s assumptions were cautious and so found less dramatic effects. However, the tax is damaging activity as well. Indeed, that is how the revenue loss comes about, via a lowering of the tax base, offsetting any gain from the higher tax rate. So, when that is put into the equation, it is ludicrous to raise such a small amount of revenue from better-off people in this way. The 45 pence rate remains too high. Nevertheless, the cut is important as a signal of the priorities being given to incentives for business and business people. Presumably, it will be followed by further reform, or so we are being led to expect.

Second, there was an added 1% cut in corporation tax, with an eventual move to 22 pence; capital allowances are somewhat reduced. This is again very welcome. Capital allowances distort investment decisions towards greater capital-intensiveness; while leaving the marginal tax rate on new profitable projects unaffected, since at the margin the extra activity or business expansion may not use these allowances. Cutting corporation tax does cut this marginal tax rate and so encourages expansion.

Further budget tax cuts come from raising personal allowances to £9,000, which is a Liberal-Democrat priority. It is not really a good idea when one considers it against the yardstick of marginal tax rates. The best schedule of marginal tax rates is flat; a higher personal tax allowance creates a bigger band where it is zero which has to be paid for by higher marginal rates of tax elsewhere. ‘Taking people out of tax’ sounds attractive administratively. Nevertheless, it is something of an illusion because many of the people ‘taken out’ go back in for tax credits and welfare benefits. Furthermore, the costly rise in the allowance is balanced by extra taxes of various sorts: the extra 7% stamp duty band on properties over £2 million is the main one. Another is the freezing of the allowances for pensioners and higher rate bands. On marginal tax rate grounds, this whole package is poor. Stamp duty in particular is a tax that damages mobility and should in any case be repealed in favour of a proper consumption tax on the imputed rent of owner-occupied housing. However, it is mandated by the politics of the coalition and as tax goes is relatively harmless. There has been a big fuss about the freezing of the pensioner allowance. However, in the context of the full indexation of pensions themselves over the last few years when real wages for other groups fell dramatically, the retired have not been badly treated.

The latest news from the economy has been more upbeat, with purchasing surveys suggesting revival, much as they are in the US. The Osborne budget should add to business confidence. With the euro-zone crisis currently relegated to the backburner as a result of the ECB’s 1 trillion euro injection of liquidity into the banking system, it should now be possible for the Bank of England to focus on getting interest rates up and unwinding its dangerously high holdings of UK government debt particularly as the news from the inflation front is ominous once more. Because it has refused to take any action to bring down inflation, the Bank has made itself vulnerable to a further dose of commodity inflation, which is now duly occurring, with both oil and food prices rising substantially. Once more this year, the Bank looks likely to seriously overshoot its inflation forecast, not to speak of its inflation target.

In these circumstances, I recommend a small rise in interest rates, of ¼%, with a bias to raise in future; and also a cancellation of the latest QE proposal of £50 billion, with a bias to unwind QE by £50 billion per quarter for the next year. If the Bank is serious about attacking the structural malaise in banking that is in turn sabotaging the growth of Small- and Medium-sized Enterprises (SME’s), then it should match the Chancellor’s overtures to business with its own overtures to bankers. It should start to put its weight behind banking deregulation and the reduction of banking costs; it should reverse the regulative overkill that UK bureaucracy has indulged in. This would complement the return to monetary orthodoxy recommended above.

Comment by David B Smith
(University of Derby and Beacon Economic Forecasting)
Vote: Hold Bank Rate.
Bias: To raise Bank Rate; QE in reserve for lender of last resort purposes.

The first comment on the 21st March Budget is that at least it did no major new damage to the UK economy. This contrasts with Mr Osborne’s previous misguided decisions to raise Value Added Tax and employer’s National Insurance Contributions, which hit the nascent economic recovery on the head, reduced output and employment, and made the public finances worse not better. That having been said, it was also a curiously ‘Brownite’ budget in two distinct senses. First, there was a lot of needless, politically-motivated tinkering with a tax system which is already massively over-complex and desperately needs simplification and reform. Second, there was a strong reliance on Gordon Brown’s old friend Rosy Scenario, and ‘jam tomorrow but never today’ where the budget deficit is concerned. Mr Osborne’s ‘narrative’ – in a spin doctor’s sense – was also interesting. At some points, he seemed on the verge of making the intellectual case for a less interventionist more pro-business approach (as represented on The Economist magazine’s amusing cover for its 24th-30th March edition). However, at other points he seemed to be playing the class-warfare card and revelling in it.

The Labour opposition now has a simple spin-doctor’s ‘narrative’. The recession was nothing to do with their own earlier policies in office; the blame lies entirely with the feckless behaviour of the rich; the country is stuck with the adverse consequences, and all that can be done is to share out the misery as fairly as possible. The Chancellor’s should have argued that the economic misery was the result of policy blunders in the area of financial regulation and monetary policy as well as fiscal overstretch by the previous government, the misery was not inevitable but could be reversed, and the way to do so was by unleashing the wealth creating powers of liberal-market capitalism. Sticking one’s head over the parapet may be too much to ask when the cabinet is made up largely of gilded ‘wealth conservators’ rather than self-made entrepreneurs. However, the default position that has gone unchallenged for too long in the UK political debate is that there are only two morally legitimate sources of income. One is living off the state, which appears to be the position adopted by Labour and Liberal-Democrats and also the BBC. The other politically-acceptable route to income appears to be via inheritance, which seems to be the, not necessarily conscious, attitude of the ‘Cameroons’.

A society which treats wealth creators badly is not likely to have much wealth generated, especially if the smaller entrepreneurs – who create most new jobs – have to divert their energies to coping with a highly complex tax system and a spider’s web of labour market regulation. Mr Osborne’s medium-term projections have economic growth picking up to 3% in the final years of his forecasting horizon 2015 and 2016. However, the supply-side policies implemented so far have been too timorous and modest for this to be achievable. At the same time, the forecast in the OBR’s post-Budget Economic and Fiscal Outlook that the cash value of general government expenditure on goods and services would only rise from £348.2bn in 2012-13 to £348.4bn in 2016-17 is eyebrow-raising, to say the least, as is the prediction that the cash value of general government gross capital formation will only increase from £30.6bn in 2012-12 to £31.2bn in 2016-17. The volume of general government consumption is officially predicted to be 9.9% lower in 2017 Q1, when the official forecasts end, than it was in 2011 Q4 (the last published data point) while the volume of government capital formation is predicted to drop by 1.3% over this period. It is also significant that the household consumption deflator is predicted to go up by 14.5% between 2011 Q4 and 2017 Q1, while the cost of general government current expenditure is expected to rise by 11.1% and that of government investment by 1.3%. Normally, government consumption costs grow by some 1% to 1¼% more each year than the inflation rate of household consumption. Mr Osborne’s projections rely on a noticeable squeeze on public sector costs, as well as real ‘cuts’.

Unfortunately, there are now few independent macroeconomic models available to provide an independent assessment of the OBR forecasts. The situation has been worsened by the chaotic and delayed introduction of the new ESA 2010 national accounts, which means that most forecasters have little faith in the reliability of the official statistics that they are including in their models. However, the Beacon Economic Forecasting (BEF) macroeconomic model has recently been re-estimated using the new ESA 2010 data and has been run to incorporate the Budget measures. The post-Budget BEF projections show UK growth averaging 1.1% this year (compared with an OBR forecast of 0.8%), 2.8% next year (OBR 2.0%), 2.4% in 2014 (OBR 2.7%), and 2.7% in 2015 and 2016 (OBR 3% for both years). The BEF’s relative optimism on short-term growth partly reflects the absence of further harmful tax shocks – the BEF model has moderately powerful supply-side effects incorporated in it – and also the scope for a recovery in world trade which should help UK export volumes, if it transpires. With limited room for household consumption growth, the UK outlook is now highly dependent on the strength of non-oil exports; especially as much domestic capital formation is undertaken to help supply overseas markets, not domestic ones.

Unlike the official forecasts, which simply assume that the official 2% CPI target is met in the outer years, the BEF forecasts show something of a ‘U’-shaped pattern with annual CPI inflation falling to 2.1% in the final quarter of this year before rising to 2.8% in 2013 Q4 and a target-busting 3.9% in 2014 Q4. This pattern is heavily dependent on wider international price trends, including those in the prices of oil and non-oil commodities, and also to the external value of sterling. The OBR expects the pound to be broadly flat at around 81 (January 2005=100) on the Bank of England sterling index. However, it is expected to follow a broadly depreciating path in the BEF projections. This means that UK inflation will exceed that in the OECD area as a whole. However, OECD inflation is itself expected to pick up over the next few years as the international output gap narrows and the lagged effects of recent extreme monetary stimuli work through to the price level. The downward trend in claimant unemployment shown by the OBR from 1.65 million in 2012 to 1.19 million in 2016 is broadly compatible with the BEF forecasts, which show a decline from 1.625 million to1.253 million. There also seems scope for an export led improvement in the balance of payments deficit over the next half decade, albeit the improvement is noticeably less marked in the BEF forecasts than the OBR ones.

Despite their relatively more optimistic short-term growth forecasts, the latest BEF forecasts do not show public borrowing coming down at anything like the pace set out in the 21st March Budget projections, however. This is despite the fact that the official forecasts for the volumes of general government consumption and capital formation have been incorporated into the BEF predictions. The borrowing overshoots that emerge do so for three main reasons. First, the costs of government spending are set endogenously and overshoot the OBR forecasts. Second, the non-socialised sector of the economy now appears too small to sustain the flow of non-oil taxes projected by the OBR. Finally, the official projections for a number of other government spending items are lower than the BEF model is projecting. This includes welfare payments and debt interest. The upshot is that the BEF predictions show public sector net borrowing (PSNB) dropping from £126 billion in fiscal 2011-12 to not quite £109 billion in 2012-13 – when the OBR anticipates a deficit of £92bn – before rising to nearly £126 billion in 2013-14 (OBR forecast £98 billion) and then easing to £110bn in 2014-15 (OBR £75 billion), £81bn in 2015-16 (OBR £52 billion) and £43.5 billion in 2016-17 (OBR £21 billion). The PSNB figure for 2012-13 has been distorted by the government’s takeover of responsibility for the Post Office Pension Fund. This has had the side effect of reducing reported borrowing by £28 billion in the present financial year and explains the deterioration between 2012-13 and 2013-14. The longer-term risk remains that it will be impossible to avoid a British sovereign debt crisis indefinitely, if further public borrowing overshoots undermine the Chancellor’s credibility in the financial markets.

Nothing has been said about monetary policy so far. However, monetary policy predominantly remains more of the same for the time being. It is arguably inappropriate to raise Bank Rate immediately after a Budget because of the implied criticism entailed. However, some normalisation of rates will be appropriate in the near future, particularly as Bank Rate is so far below the rates at which commercial banks can raise funds in the money markets that it risks irrelevance. There has also probably been enough QE for the time being. Any future tranches of QE should only be considered if broad money growth threatens to turn negative or there is a renewed financial crisis which requires the Bank to act as a lender of last resort. Bank Rate should be held in April, but with a strong bias to raise rates thereafter. Furthermore, there should be no additional QE for the time being.

Comment by Peter Warburton
Economic Perspectives Ltd)
Vote: Hold Bank Rate, with no extension of QE.
Bias: To raise Bank Rate.

Over the past few months, there have been several indications that the structural damage to the UK monetary sector is repairing. Regarding M4 lending, the three-month annualised growth rate in the measure that excludes intermediate other financial corporations (OFCs) has lifted from minus 6.4% last September to plus 4.2% in January. Gross mortgage lending in the three months to January 2012 was up by 6.6% on the previous three months and 13.4% higher on the year. The total mortgage stock is rising at a 1.3% annualised three-monthly pace, up from zero very recently. Banks and building societies wrote off £15.3 billion last year, down 12% from two years ago and 9% from last year. Write-offs in the fourth quarter of 2011 were 23% lower than a year earlier. Regarding the M4 money stock, excluding intermediate OFCs, the annual growth rate in January was 2.9% as compared to 1.6% last March. The deposits of the household sector grew by 2.8% in the year to January, up from 1.8% in June; deposits of private non-financial corporations decreased by 1.3% in the year to August 2011 but were 3.8% higher in January, year-on-year. Competition for retail savings has improved; the average interest rate paid on time deposits is now 1.23% as compared to 0.83% in August.

These encouraging developments signal that the Bank of England’s de facto credit tightening of 2010 and 2011 has ended and that the resumption of gilt purchases by the Bank has begun to have an impact on the broad monetary aggregates. However, the strategy of purchasing gilts at their lowest yields (highest prices) in living memory is already looking shaky as government bond markets have begun to surrender some of their extraordinary price gains of last summer. There is no justification for extending the QE programme. However, The Bank’s reluctance to take steps to revive the wholesale funding markets, including securitisations, is holding back the healing of the monetary system. Commercial banks can never revert to a purely customer-deposit funding model, but their willingness to extend credit continues to be tightly constrained by the lack of funding liquidity. If the interbank market is broken beyond repair, then a substitute (collateralised) market is urgently required to take its place. The revival of the interbank and securitisation markets, through which monetary policy formerly operated, is vitiated by near-zero interest rates.

The March Budget lays some better foundations for a consumer recovery during 2013, but another year of heavy lifting lies ahead for the household sector. Job shedding in the public sector has occurred more rapidly than expected while the loss of economic momentum last year has damaged opportunities for household income growth in the private sector. Past and present Budget changes to income tax and National Insurance payments imply a further increase in the household tax burden for 2012-13. The inflation optimism of the Office for Budget Responsibility and the Bank of England’s Monetary Policy Committee for 2012-13 is poorly founded and hence real disposable income is not expected to register an annual gain this year.

Bizarrely, the OBR has upgraded its consumer spending outlook for 2012, relative to last November, while downgrading its business investment projections. The stated justification for the stronger household consumption forecast was that the receipt of windfall gains from the mis-selling of payment protection insurance (PPI) are more likely to be saved than spent. About £2 billion of compensation was paid in 2011, with a further £6 billion set aside by UK banks. However, the recent experience of one-off income supplements suggests that the saved proportion will be quite high. Set against the expansionary PPI effect is the adverse impact from increases in mortgage interest rates. The average standard variable rate (SVR), now paid by more than half of all mortgagees, has drifted up to 4.17% in February from 3.98% last May. Halifax, Royal Bank of Scotland and Santander have recently announced rate increases from previously attractive levels that will lift the average SVR even higher.

Sluggish private sector loan growth and weak transmission of negative real interest rates to the real economy remain key impediments to a more vigorous UK recovery. Hence, this is not the moment to raise Bank Rate. However, the reconnection of Bank Rate with the market interest rate structure cannot be postponed indefinitely. A token Bank Rate increase should be pencilled in for later on in the present year.

Comment by Trevor Williams
(Lloyds TSB Corporate Markets)
Vote: Hold Bank Rate and maintain QE.
Bias: To ease via QE if broad money growth slows.

The 21st March UK Budget did not deviate from the task set out in the very first Budget under Chancellor Osborne in June 2010, and reiterated at the start of his speech, to get the Budget deficit down to manageable levels within five years. This meant that what he gave with one hand he took away with the other, so that there was no net real change in either the path, or the level, of the budget deficit and debt. By 2015/16, the budget deficit is expected to be back in surplus after taking account of the economic cycle, which is in line with the projections made in the 2011 Autumn Statement. In short, this was a ‘fiscally neutral’ Budget and so contained no net tax give-away over the forecast horizon. Real cuts in spending are scheduled for the remainder of this Parliament and beyond. To be sure, with borrowing in fiscal 2011-12 now projected to have been £126bn or 8.3% of GDP, the Chancellor had little choice in the matter. With the UK on negative watch from some rating agencies, a net tax give-away or radical Budget was clearly judged too risky and the need to retain Britain’s ‘safe haven’ status too urgent.

Yet, there were some significant changes announced. Most were widely discussed ahead of the Budget, including a rise in the personal tax allowance and a cut in the corporation tax rate to 24%, with the promise of further reductions to 22% by fiscal year 2014/15 and thence to 20%. These were paid for by a rise in stamp duty, to 7% for properties over £2 million; cuts in the income tax threshold for basic rate and upper rate tax payers; a reduction in age-related allowances and a crackdown on tax avoidance. The latter includes a 15% stamp duty on people buying properties through overseas companies.

Also helping to pay for the give-aways, was a rise in the bank levy, so that the net take for the Exchequer remained at around £2.5 billion. There were efforts to help growth. However, these measures added up to very little in total and are unlikely to boost the economy. In this regard, therefore, it is no surprise that the economic assumptions for 2012 and 2013 are roughly unchanged at 0.8% and 2% growth, respectively. Further out, the OBR assumption remains at 3% for economic growth in 2015 and 2016, which seems somewhat optimistic compared to independent forecasts. Risk to 2012 and 2013 remain significant, especially from Europe and higher oil prices. All in all, this was a Budget that was steady as you go, which suggests that the perception of the UK as a safe haven remains intact for now.

There should be little implication of any policy reaction in light of the unchanged growth figures. There was also an acknowledgment that inflation will average 2.8% this year. On the surface, this is higher than the Bank of England assumption. For now, the bias for monetary policy should be to keep Bank Rate at the three year low of 0.5%, and to maintain QE for the time being. This is to help offset the fiscal tightening underway and to keep money supply growth positive in face of the regulatory restraints and the risks from private sector and bank balance sheet reduction this implies.

What is the SMPC?

The Shadow Monetary Policy Committee (SMPC) is a group of independent economists drawn from academia, the City and elsewhere, which meets physically for two hours once a quarter at the Institute for Economic Affairs (IEA) in Westminster, to discuss the state of the international and British economies, monitor the Bank of England’s interest rate decisions, and to make rate recommendations of its own. The inaugural meeting of the SMPC was held in July 1997, and the Committee has met regularly since then. The present note summarises the results of the latest monthly poll, conducted by the SMPC in conjunction with the Sunday Times newspaper.

Current SMPC membership

The Secretary of the SMPC is Kent Matthews of Cardiff Business School, Cardiff University, and its Chairman is David B Smith (University of Derby and Beacon Economic Forecasting). Other members of the Committee include: Roger Bootle (Capital Economics Ltd), Tim Congdon (International Monetary Research Ltd.), Jamie Dannhauser (Lombard Street Research), Anthony J Evans (ESCP Europe), John Greenwood (Invesco Asset Management), Ruth Lea (Arbuthnot Banking Group), Andrew Lilico (Europe Economics), Patrick Minford (Cardiff Business School, Cardiff University), Gordon Pepper (Lombard Street Research and Cass Business School), Akos Valentinyi (Cardiff Business School, Cardiff University), Peter Warburton (Economic Perspectives Ltd), Mike Wickens (University of York and Cardiff Business School) and Trevor Williams (Lloyds TSB Corporate Markets). Philip Booth (Cass Business School and IEA) is technically a non-voting IEA observer but is awarded a vote on occasion to ensure that exactly nine votes are always cast.

A link to the OECD's latest update: more upbeat on America, no more upbeat on Europe. Available here.

House prices have fallen by 1% in March, according to the Nationwide, converting a 0.9% annual rise a month ago into a 0.9% annual fall this month. The removal of the stamp duty concession for first-time buyers may have been a factor, though the increase in standard variable rates by many mortgage lenders will not have helped. Nationwide expects prices to be flat or slightly lower for the remainder of the year. Its release is here.

The slowdown in the housing market, and the likely stamp duty effect, was confirmed in data from the Bank of England. Mortgage approvals slumped to 48,986 in February, from 57,899 in January. The January numbers were boosted by the rush to beat the stamp duty deadline, the February figures depressed. More here.

There was better news from the Office for National Statistics on service sector output. It rose by 0.2% between December and January and was 0.5% up on its fourth quarter average. Service sector output in January was 1.8% up on a year earlier, as detailed here.

When the fourth quarter GDP figures were first published showing a decline of 0.2%, there was some relief that the fall wasn't bigger. Now we know it was - the Office for National Statistics has revised the number to a fall of 0.3%. This is, of course, an early-stage revision: in a couple of years time the GDP figures will look nothing like this.

Everything apparently fell in the fourth quarter, with the service sector down 0.1%, construction 0.2% and industrial production 1.3%. An energy-related drop in industrial production is plausible, as is the drop in construction as weaker public spending bites. But the service sector number looks out of line with the surveys.

Consumer spending rose by 0.4% in the fourth quarter but was down by 1% on a year earlier, while govenment consumption was up by 0.5%. Overall investment dropped 0.6%. Exports of goods rose 4% in Q4 but exports of services fell by 2%.

So disappointing numbers, of which more here. There was better news on the balance of payments, with the current account deficit down to £8.5 billion, from £10.3 billion in Q3.

A 0.8% drop in retail sales volume in February was disappointing, as was the downward revision of the January increase from 0.9% to 0.3%. To be fair, retailers have been surprised by the strength of the official numbers, given the surveys, so a weaker number was perhaps to be expected: these things have a habit of catching up.

Barring a very weak March number, first quarter retail sales volume should be up on the fourth quarter of 2011. Volumes in December-February were up by 0.7% on the previous three months and the January-February average is 0.3% up on the fourth quarter average. Even so, a setback. More here.

A budget that cuts the top rate of tax from 50p to 45p, raises the personal allowance next year from £8,105 to £9,205 and reduces the main rate of corporation to 24% from April, 22% in two years, and with an ambition of 20%, can't be all bad.

Along the way, George Osborne stemmed the self-inflicted wound of removing child benefit from higher rate taxpayers. Instead, households will only start to lose the benefit when there is an earner on £50,000 and it will be progressively but not suddenly withdrawn up to £60,000, after which it will stop. A messy but probably politically effective solution.

The economics of the budget were straightforward enough; this mornings's disappointing public finances destroyed hopes of a big undershoot in borrowing, and of any giveaway. The Office for Budget Responsibility's 2011-12 number came down only fractionally, from £127 billion to £126 billion.

There was a similar small change in the OBR's growth forecast, up from 0.7% to 0.8% this year. In general, though, it remains a story of jam tomorrow - 2% growth in 2013, 2,7% in 2014 - low inflation, which will help restore real income growth and thus consumer spending, is key to this.

Was it a tax reforming budget? Not in the 1888 Nigel Lawson sense. Indeed not in many senses. It appeared too detailed and micro for that. Were there any surprises? If there were, they were all in the small print. Did it do enough at this stage of the parliament? Probably.

At last night's property press awards, sponsored by LSL, I was awarded the property columnist of the year prize. Thank you to the judges, commiserations to the runners-up and congratulations to all the other winners, listed and pictured here.

Inflation fell to 3.4% in February, from 3.6% in January. This was the lowest since November 2010 and, according to the Office for National Statistics, "the largest downward pressures to the change in CPI annual inflation between January and February came from domestic electricity and gas, recreation & culture and transport".

RPI inflation, meanwhile, dropped from 3.9% to 3.7%, its lowest since February 2010, with "the largest downward pressures from motoring expenditure and fuel & light". These are welcome falls and suggest that the high-inflation nightmare of 2011 is starting to come to an end. The release is here.

It is not, however, all plain sailing. The CBI, in a generally strong industrial trends survey, here, says production is picking up but inflationary pressures are rising, which is blames on a higher oil price. Oil, to mix metaphors, could still be a spanner in the works.

The Guardian's story that George Osborne is "poised to slash" the 50p rate on earnings above £150,000 has livened up the debate. The position on the top rate has been clear for some time. It probably raises very little net revenue and, according to the Institute for Fiscal Studies, may even have a negative revenue effect.

On the other hand, the politics of early abolition are awful - at a time of widespread public pain and anger of bankers' bonuses - and the revenue evidence from Her Majesty's Revenue & Customs is unlikely to be yet conclusive because many top earners brought forward earnings to escape it. The bankers' effect could arguably be tackled by a special bonus tax but the government has said repeatedly its bank levy is a better way of taxing the banks.

For these reasons, most of the speculation has been about a strong signal on future abolition, or even a staged reduction to 45p then 40p, rather than immediate abolition. Maybe this explains why Liberal Democrats have been so voluble on tax in the run-up to the budget. There are important meetings of the "quad" of David Cameron, George Osborne, Nick Clegg and Danny Alexander today - originally it was thought the key decisions had to be agreed earlier in the week - so we shall see what happens. The story is here.

The latest labour market statistics were, it should be said, mixed. The good news was that unemployment, 2.67m, remained steady for a third successive month. What appears to have happened is that, having remained flat at roughly 2.5m for two years from mid-2009, there was a lurch higher in the summer and autumn of last year, followed by stabilisation.

The detail was less encouraging. Employment rose by only 9,000 over the latest three months and all of this and more was due to a rise in part-time employment (up 59,000), offset by a drop of 50,000 in full-time jobs. So on an hours-adjusted basis employment fell.

The underlying weakness of the labour market was reflected in earnings growth of 1.4% (1.7% excluding bonuses) showing that the squeeze on real earnings persists.

There's better news in the fact that private sector employment, up 683,000 over the past two years, has more than outweigned the drop of 390,000 in public sector employment (which is now down to 2003 levels) over the period. Details here.

I'm tempted to say that Alan Beattie has written an entertaining little book on the crisis and the uselessness of politicians in it. But, to be strictly accurate, this is not a book but a Penguin Short available for digital download, here. It is, however, hugely entertaining. This sums it up:

"At every stage since the crisis hit, two things have become clear. One is that the governments, central banks and international institutions charged with safeguarding the world economy have had almost no idea about the severity of what was coming. The second is that official reactions have for the most part been slow and inadequate within countries and disjointed and uncoordinated between them.

"At each turn, the international response to the successive attacks of financial contagion has been hobbled by complacency, misplaced ideology, a failure to coordinate and a lack of political will."

If there's a criticism, it is that Beattie goes a little easier on central banks than politicians. Maybe Mervyn, Jean-Claude, Ben and Co will get another volume. But that is a minor point. And the virtue of this electronic book is that it is written by somebody who was there: waiting (you always have to wait) for the politicians to show up at their press conferences and trot out their inanities.

He pulls apart Gordon Brown's moment of greatest triumph, the G20 summit in London's Docklands in April 2009:

"‘The Trillion-Dollar Summit’ was the headline Mr Brown wanted, and by and large he got it. He claimed to have achieved a $1.1 trillion boost to the world economy, including $500 billion for the IMF’s war chest, a $250 billion boost for trade and a $250 billion increase in the global money supply. The Guardian newspaper, a habitual cheerleader for the Prime Minister, ran its story under the millenarian headline ‘Brown’s New World Order’, and even less slavishly loyal papers were enthusiastic.

"The reality was less impressive. The $500 billion for the IMF was very welcome, as the institution had already started to eat into its reserves with a string of rescue loans for Eastern European countries in late 2008. But some of the money was already in train – Japan had offered a $100 billion loan the previous year – or would not be agreed until months after the summit, and an increase in the future firepower of a crisis lender was not an immediate boost to the world economy.

The $250 billion support for trade was more like $4 billion: it was a subsidy for the provision of trade credit (a basic form of finance that had been in short supply during the credit crunch) and the $250 billion was a highly optimistic assessment of the amount of trade that subsidy might help support over three years. The $250 billion boost to the world’s money supply was an issuance of ‘Special Drawing Rights’, a form of asset that governments could add to their foreign exchange reserves and use if they chose to. As it happened, most chose not to.

"The standard view of the G20 among most commentators is that it started well, in Washington and London, but thereafter achieved little. In reality, only the second half of that is true."

There's also a wonderful spoof report, writen by Beattie while waiting for some press conference or other to start:

"An ineffectual international organization yesterday issued a stark warning about a situation it has absolutely no power to change, the latest in a series of self-serving interventions by toothless intergovernmental bodies.

‘We are seriously concerned about this most serious outbreak of seriousness,’ said the head of the institution, either a former minister from a developing country or a mid-level European or American bureaucrat. ‘This is a wake-up call to the world. They must take on board the vital message that my organization exists.’

"The director of the body, based in one of New York, Washington or an agreeable Western European city, was speaking at its annual conference, at which ministers from around the world gather to wring their hands impotently about the most fashionable issue of the day. The organization has sought to justify its almost completely fruitless existence by joining its many fellow talking shops in highlighting whatever crisis has recently gained most coverage in the global media.

‘Governments around the world must come together to combat whatever this year’s worrying situation has turned out to be,’ the director said. ‘It is not yet time to panic, but if it goes on much further without my institution gaining some credit for sounding off on the issue, we will be justified in labelling it a crisis.’

Great stuff, and worth £1.99 of anybody's money.

The surveys may be strong but the official data is not, not yet at least. This morning's releases from the Office for National Statistics have put the possibility of a drop in gross domestic product in the first quarter back on the agenda, even though there's a long way to go.

Manufacturing output edged up by 0.1% in January. That was a little less than expected but puts manufacturing on course for a decent Q1 bounce - January was comfortably above the Q4 average. However, industrial production fell by 0.4% and in January was 0.3% below the Q4 average. Energy production was the culprit again. It remains to be seen whether February and March will be strong enough to lift production into positive territory. More details here.

More concerning was the official data from the construction sector. The numbers remain somewhat experimental and are not seasonally-adjusted but show a drop of more than 12% in construction output in January, after a fall of over 10% in December. The assumption has to be that most of this is seasonal, and the ONS, in its release here, does not flag up any particular alarm bells. But this is another drag of Q1 GDP, possibly a large one. Nobody said it would be easy.

The service sector purchasing managers' index fell from 56 in January to 53.8 in February, slightly weaker than had been expected. This followed three months of rises. Taken together with the other purchasing managers surveys, the economy appears to be on course for growth of 0.3% to 0.4% in the first quarter, though as the Bank of England has warned, things could be weaker in the second as a result of the additional bank holiday. This is Markit's verdici:

“Despite seeing some loss of momentum in February, the service sector continued to grow at a robust pace, adding to signs that a double-dip recession will be avoided. So far this quarter, the sector has notched up its best performance since the spring of 2010, when the economy was rebounding strongly from the recession.

“Combined with the ongoing modest growth in manufacturing and upturn in the construction sector, the latest services PMI data suggest that the economy will expand modestly in the first quarter, provided that no significant further loss of momentum is seen in March. The outlook in fact seems to have brightened, with business confidence about the year head hitting a 12 month high and firms again taking on more staff in February."

Given the strength of recent manufacturing surveys, including the CBI's, the easing in the manufacturing purchasing managers' index from 52 in January to 51.2 in February was mildly disappointing. It underlined the fact that, with the eurozone in recession, growth is still a challenge for industry.

This was Markit's verdict: "UK manufacturers continued to raise production and employment in February, building on the solid foundation seen so far at the start of 2012. This raises hopes that the sector will post an expansion over Q1 as a whole, or at least improve on the disappointing 0.9% contraction seen at the end of last year."

Earlier, the Nationwide reported a 0.6% rise in house prices in February, for a rise of 0.9% on a year earlier. Prices are 10.6% lower than their autumn 2007 peak in cash terms, and 22.6% lower in real terms. More here.

Weak money supply growth has been one of the Bank of England's concerns but the January numbers suggest a significant bounce. The three month annualised growth of the M4 money supply measure rose to 4.2% in January from minus 0.9% in December, helped by a £29 billion jump in this broad money measure. It would be tempting to see this as a direct response to the resumption of quantitative easing in October but it is not clear this is the case. More details here.

Radio 4's Broadcasting House asked me to imagine the consequences of Greek austerity, if translated to Britain. This is what I said:

If Britain were Greece ….

We would be in the middle of the longest and deepest recession in the modern era, much worse than the Depression years of the 1930s, with no end in sight.
Unemployment would be nearly 7 million, more than a fifth of the workforce, 2.5 million of it among young people. Half of our young people would be out of work.

If Britain were Greece ….

Workers, particularly low-paid workers, would be about to be hit by a lot of pain. The minimum wage would be cut from £6.08 to £4.74, while the rate for young people would be cut from £4.98 to £3.39.
More than 100,000 public sector workers would be put into “reserve” – a waiting room for redundancy – and their salaries immediately cut by 40%. Well over a million public employees would be sacked by 2015. All public sector workers would see their wages, not just frozen, but cut sharply.

If Britain were Greece …

VAT would got up to 24%, we’d pay a “solidarity” levy of up to 5% of income, and new taxes on property. Alcohol and tobacco duties would go up by a third and we’d pay roughly £2 a litre for petrol and diesel: £120 to fill the tank of a family saloon. Anybody with a yacht or luxury car would pay extra tax on it.

People with a state or public sector pension above £800 a month would see it cut by 20%. Anybody with a pension above that level who had retired before the age of 55 would see it cut by 40%. Early retirement would become a thing of the past. The equivalent of Greece’s retirement age increase in Britain would be a rise in the state pension age to well over 70. All state benefits would be cut for years and be strictly means-tested..

If Britain were Greece ….

The defence budget would be slashed by a fifth – in cash – drastically reducing the number of military personnel and making it hard to maintain the army, navy and air force as viable separate services. NHS spending, instead of being ringfenced, would drop by a sixth. Treatments would be withdrawn, dozens of hospitals would be cut and tens of thousands of medical staff would lose their jobs. Education spending would not escape the axe, necessitating the merger or closure of thousands of schools and huge redundancies among teachers and support staff.

If Britain were Greece ….

We wouldn’t even have the weather to ease the gloom.

The second estimate of gross domestic product for the fourth quarter showed a drop of 0.2%, as expected, though the detail was interesting. On the production side, the mild weather contributed to a bigger drop in gas and electricity supply than originally estimated, while on the expenditure side a big drop in gross fixed capital formation, 2.8%, offset a 0.5% rise in consumer spending and a 1% increase in government final consumption expenditure. The drop in the trade deficit from £4.4 billion in the third quarter to £2.5 billion in the fourth meant net trade contributed to growth.

The figures showed a 0.1 point downward revision to growth in the first and third quarters, reducing the 2011 growth rate. This is the Office for National Statistics' description:

"GDP over the year [2011] grew by 0.8 per cent, compared with 2.1 per cent for 2010. The economy has now recovered just under half of the output lost during the 2008-09 downturn – growth of 3.4 per cent since the end of the contraction, during which GDP declined by more than 7 per cent.

"The subdued economic environment and sentiment continued into the last quarter of 2011, with a number of key economic indicators, in addition to GDP, reflecting the adverse economic conditions in the UK, as well as in the euro area."

These are, of course, early days. GDP revisions tend to come later and investment is one of the most revised series. This time last year the ONS put growth in 2010 at 1.3%. Now it is 2.1%. More on the latest numbers here.

Ahead of the Bank of England monetary policy committee's February meeting, the view was that it was a choice between £50 billion and £75 billion of additional easing. In the event, seven MPC members went for £50 billion and two, Adam Posen and David Miles, voted for £75 billion. The £50 billion crowd noted recent stronger data and the risk that a vote for more would be interpreted as a sign of Bank bearishness.

The MPC's central view is summed up in this paragraph:

"The Committee’s central view was that inflation would decline further during 2012 as the contributions of energy and import prices continued to wane and as spare capacity weighed on wages and prices. But the speed and extent of the fall remained uncertain, and would depend, in part, on the strength of demand. Growth was likely to be volatile in the near term, given the impact of one-off factors, particularly the additional bank holiday associated with the Queen’s Diamond Jubilee in the second quarter. But thereafter growth should strengthen gradually, supported by a recovery in households’ real income growth and the expansionary stance of monetary policy. Headwinds from the weak external environment, tight credit conditions and the fiscal consolidation were, however, likely to continue to depress spending, so that some margin of economic slack was likely to persist."

It notes, however, the risks in either direction, including hgher inflation from energy and commodity price hikes. The minutes are here - and contain no clear hint of further easing.

Public sector net borrowing in January was negative by £7.8 billion - there was a budget surplus - £2.5 billion up on a year earlier and £1.5 billion better than market expectations. The Office for Budget Responsibility revised up its borrowing projection for 2011-12 in November from £122 billion to £127 billion.

That looked puzzling at the time and looks even more puzzling now. It will be disappointing if borrowing does not come in below £122 billion for 2011-12. If so, this will cast doubt on the OBR's forecasts for later years.

The OBR, here, is not quite prepared to throw the towel in yet, though it points out that to meet its forecast, borrowing for the final two months of the fiscal year will have to be £7 billion higher than a year earlier, breaking the recent trend.

The January numbers do not answer the question of whether the 50% tax rate is bringing in extra revenue. Income tax and capital gainst tax receipts were up by a modest 1.5% on a year earlier but the OBR points out the likelihood of some slippage into February (the self-assessment deadline was extended because of industrial action), which is also when financial sector bonuses tend to be paid. Even so, the 50% rate is not yet resulting in any revenue bonanza.

It is not the done thing to be remotely optimistic about Greece but maybe we should give the 2nd rescue package, 130 billion euros and plenty of haircuts for the banks, a chance. It is a long time since the Greek economic miracle of the 1950s and 1960s, when growth averaged 7% a year, but in the 10 years before the crisis Greek growth averaged 4% a year. The question is whether the austerity leaves any room at all for growth. It should leave some.

The eurozone crisis is far from over and has many twists and turns ahead, as the markets are indicating. But, largely thanks to the actions of the European Central Bank, sentiment has improved. The question is whether we should now have to turn our attention to Iran, and the risk of a sustained spike in oil prices.

The above is a chart from last week's Bank of England inflation report. The black line shows the current published numbers from the Office for National Statistics. The green fan shows, not only the Bank's forecasts, but also its own estimates of past growth. The sharp-eyed will note that there is a clear expectation at the Bank that, as in every previous cycle, the initial GDP figures will be revised higher. Mentioning no names but you would expect anybody who had worked at the Bank to be aware of this.

The bible for the national accounts is, of course, the Blue Book, the latest edition of which was published last November. It revised up the average annual growth rate from 1997 to early 2011 from 1.9% to 2.2%. There is no reason to believe that past revision patterns will be any different in the future. Indeed, this is basic stuff.

Another upside surprise. Surveys had suggested retailers struggled in January but official figures showed a 0.9% jump in volumes compared with December and a 2% rise compared with a year earlier. Sales values were up by 4.4%.

If you wanted to make the case that lower inflation will bring forward more spending there's support in these numbers. Retail inflation (the retail sales deflator) fell to 2.2%, its lowest since November 2009. More here.

A better set of jobless figures than had been feared. Though there was a 48,000 increase in Labour Force Survey unemployment in the October-December 2011 period, to 2.67 million, this was actually smaller than the 2.68 million reported for the September-November period. This fits other data suggesting activity strengthened during the quarter.

Employment rose by 60,000 in the final quarter and was up by 7,000 on a year earlier. Though there is a recent bias towards part-time work, this suggests private sector employment is just about offsetting public sector losses.

Claimant count unemployment rose by 6,900 in January to 1.6 million, 5% of the workforce. Unlike three years ago, when the economy was diving into recession and monthly claimant count rises exceeded 100,000, this is a modest rise. More here.

The news is understandably dominated by Moody's overnight negative watch on the UK's AAA sovereign debt rating. In many ways it is remarkable the UK still has a AAA rating but the timing is curious. Very recent growth data has been encouraging and you would have thought they would have waited for the key January public finance numbers.

More important is the drop in inflation in January to 3.6%, from 4.2%, as last year's VAT hike dropped out of the comparison. In line with expectations and on course to drop to 3% over the next couple of months. More important is what happens after that. Retail price inflation 3.9%, lowest since February 2010. More here.

Readers are probably already bored with the debate between me and David "Danny" Blanchflower, formerly of the Bank of England's monetary policy committee, but this is a final instalment, from me at least.

In his response, here, there is a Hallelujah moment. He has, he says, never said that the slowdown is entirely due to the coalition's strategy. "Fiscal tightening is just part of the explanation," he writes.

Exactly. Tax hikes and spending cuts reduce growth but so does the high-inflation squeeze on real incomes, the eurozone crisis and most importantly, as Rogoff and Reinhart have demonstrated, because recoveries after financial crises are usually weaker and more protacted than normal ones. So I look forward to hearing Danny spreading the blame for the slowdown, though I am not hopeful.

Danny also suggests I have "helped to establish the false narrative that Labour caused the crisis". Not so and, indeed, I have gone out of my way to stress the global nature of the crisis and that it would have been little different had the Tories been in charge.

But Labour was in charge and, as Ed Balls has conceded, has to accept part of the blame for its failure to regulate the financial system. It also has to accept part of the blame for the clumsy initial response to the crisis by the Bank of England and Treasury, which for a while made a difficult situation worse.

There would have been a lurch into large deficit whatever the state of the public finances before the crisis but the absolute size of the deficit was larger because of Labour's failure, under Gordon Brown, to stick to the golden rule. At the time, only people like Martin Weale of the National Institute were brave enough to point this out but now it is generally accepted, as in the recent Office for Budget Responsibility exercise. A pre-crisis deficit of 1% of GDP would have meant a smaller deficit when the crisis hit, and potentially more room for emergency Keynesian measures.

The big difference between us, I think, is not ideological but in use of the data. I examine the numbers, and report them. If there is good news among the bad, I report that. If it is bad, it gets reported as bad. You cannot hide bad news.

Was I being optimistic in reporting the January service-sector and manufacturing purchasing managers surveys as being good news? "UK economy shows renewed vigour in January" said Markit, here, which produces the data. Not my words, theirs.

Is it over-optimistic to say house prices were "resilient" at the end of 2011, when an average of the main house price indices shows them to have been flat over a year in which household real incomes recorded a record fall and unemployment rose? I don't think so.

As for GDP and the prospect of upward revisions in future, he should know that the Office for National Statistics has not begun to scratch the surface yet. Box 2.1 on p26 of this OBR report, here, shows the extent to which the initial data was revised up over many years, as it will be again. This, by the way, makes comparisons between this cycle and the 1930s facile.

As I say, it is important to look at the data. Danny is known as a labour market economist. Last year I criticised him for gloomily highlighting a "dramatic decline" in working hours in the second quarter of last year. Much of it, I pointed out, was due to the extra bank holiday for the royal wedding.

His response was to highlight the "monthly" figures for hours worked in March and May in the Labour Force Survey, which were also weak, and to say:
"Good try David. So how exactly would a bank holiday in April lower hours in March or May? Time to get your facts straight, mate, before coming after yours truly. The coalition is responsible for reductions in the demand for labour, hence the poor spending data."

This was, unfortunately, a second error, which a labour market economist should not make. The "monthly" figures on the ONS website for Labour Force Survey data are three-monthly averages, as the statisticians are happy to confirm. So "March", is the February-April average, "April" is the March-May average and "May" is the April-June average. They were all affected by the extra bank holiday. Boring but true. The facts were straight.

The Bank of England has come in for more flak ahead of this week's decision on QE than at any other time. Whether that persuaded it to limit the additional amount to £50 billion (the choice was between that and £75 billion) or somewhat stronger data remains to be seen. It is unlikely that the vote was unanimous. This is what the Bank said:

"The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to increase the size of its asset purchase programme, financed by the issuance of central bank reserves, by £50 billion to a total of £325 billion.

"In the United Kingdom, the underlying pace of recovery slowed during 2011, with activity falling slightly during the final quarter. Some recent business surveys have painted a more positive picture and asset prices have risen. But the pace of expansion in the United Kingdom’s main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries. A gradual strengthening of output growth later this year should be supported by a gentle recovery in household real incomes as inflation falls, together with the continued stimulus from monetary policy. But the drag from tight credit conditions and the fiscal consolidation together present a headwind. The correspondingly weak outlook for near-term output growth means that a significant margin of economic slack is likely to persist.

"CPI inflation has fallen back from its September peak, declining to 4.2% in December. Inflation should continue to fall sharply in the near term, as the increase in VAT in January 2011 drops out of the twelve-month comparison. Inflation is then likely to decline further as the contribution of energy and import prices diminishes, while downward pressure from unemployment and spare capacity continues to restrain domestically generated inflation.

"In the light of its most recent economic projections, the Committee judged that the weak near-term growth outlook and associated downward pressure from economic slack meant that, without further monetary stimulus, it was more likely than not that inflation would undershoot the 2% target in the medium term. The Committee therefore voted to increase the size of its programme of asset purchases, financed by the issuance of central bank reserves, by £50 billion to a total of £325 billion. The Committee also voted to maintain Bank Rate at 0.5%. The Committee expects the announced programme of asset purchases to take three months to complete. The scale of the programme will be kept under review."

As surveys had suggested, manufacturing got stronger as the fourth quarter went on. Today's official figures show a 1% jump in manufacturing output in December, enough to push annual growth back into positive territory (0.8%). Given that the surveys have pointed to even stronger growth in January, this is encouraging.

Overall industrial production also rose, by 0.5%, but not by enough to change fourth quarter GDP at this stage. Overall industrial production fell by 3.3% compared with a year earlier, dragged down by energy supply. This was a significantly depressing factor in fourth quarter GDP.

As the Office for National Statistics put it: "Gas supply output was the main downwards driver, falling by 14.0 per cent, with the comparatively mild weather in 2011 Q4 and reduced demand for gas in the generation of electricity factors in the fall." More here.

Alongside the industrial production numbers, there was a big drop in the monthly trade deficit, from £2.8 billion (goods and services) in November, to £1.1 billion in December, its lowest since April 2003. Exports rose marginally (in value terms), while imports fell by 3.4%.

The overall trade deficit fell from £36.7 billion in 2010 to £28 billion in 2011, though the trade in goods deficit increased from £98.5 billion to £99.3 billion. That was mainly due to a widening in the trade deficit in oil, up from £4.7 billion to £11.1 bilion. More here.

The British Retail Consortium says retail sales values were up by 2.1% year-on-year in January, though sales were down by 0.3% on a like-for-like basis (adjusted for additional floor space and store openings). No doubt that these figures were weaker than December, when stores benefited from a late boost in spending and comparisons with the snow disruption of December 2010.

It should be remembered that January 2011 benefited from December 2010's disruption, despite the VAT increase that month. Even so, the BRC numbers suggest a weak start to the year, in contrast to figures from, say, John Lewis.

Interesting to note that retail floor space is still expanding, when many retailers have fallen by the wayside. Details here.

In his article in the latest New Statesman, here, David "Danny" Blanchflower accuses me of being a "Tory cheerleader" for suggesting that the fourth quarter GDP figures, which showed a fall of 0.2%, were likely to revised higher.

I am tempted to respond by calling him a Labour lackey but I would not stoop so low, not least because to descend to this kind of name-calling is usually the last resort of the desperate. As it is, I'd remind Danny I made the same point about the GDP figures in the third and fourth quarters of 2009, when Labour was in power, and when the Office for National Statistics also pitched its initial etimates too low. I also defended Alistair Darling's November 2008 fiscal stimulus against Tory attacks.

As for other points about the fourth quarter GDP numbers. I know Danny does not follow the details, but the Office for National Statistics dwelt at some length on the impact of the one-day public sector strike and the impact of the mild weather on gas and electricity supplies is clear from the figures. However, as I said in the very next sentence: "I am not pretending that these were anything but disappointing figures." Not much cheerleading there.

I used to like Danny. He was one of the more surprising appointments to the Bank of England's monetary policy committee but livened up the debate. But he behaved badly in badmouthing his former colleagues at every opportunity when he left the committee, knowing as public officials they could not respond.

Had he presented the kind of analysis he did in his latest New Statesman column while at the Bank, he would have been laughed out of the building. Apparently there have been three stages in the economic cycle in recent years: the global recession (i.e. nothing to do with the government) from 2008 Q1 to 2009 Q2, the "Darling recovery" from Q3 2009 to Q3 2010 and the "Osborne collapse", from Q4 2010 onwards.

Why? Why doesn't the coalition get half of Q2 2010 and the whole of Q3? Or, if you're applying lags, why should they stop at the start of Q4 2010, which happens to be the point at which GDP goes into reverse? What about the fact that Darling's fiscal tightening kicked in in 2010-11?

Danny's problem is that he may be the only economist in the country - or, rather, viewing the country from New England - who thinks Britain's slowdown is entirely due to the fiscal tightening. There may have been a "global recession" for the UK in 2008-9 but the global slowdown and the eurozone's woes apparently had nothing to do with the UK's slowdown in 2011. Nor, it seems, did 5% inflation (which I seem to remember him advocating), responsible for the biggest drop in household real incomes in the post-war period. His is not, I'm afraid, a serious analysis.

As for other criticism of me, that I predicted that private sector jobs will more than outweigh losses in the public sector, it will be astonishing if they do not. During the long upturn from 1992 to 2008 Britain added 4m net new jobs. All of them, in net terms, were in the private sector. Public sector employment fell sharply in the 1990s before rising in the 2000s.

That was then, what about now? In the two years to September 2011, public sector employment fell by 366,000 but private sector employment rose by 581,000. The position is more balanced in the latest 12 months; 275,000 public sector job losses against 262,000 private sector gains but that reflects many more public sector job losses than were expected at this stage by the Office for Budget Responsibility. There may be an element of bunching.

Only if we get large-scale private sector job losses alongside the public sector ones will we get the 4m or 5m unemployment confidently and so far inaccurately predicted three years ago by Danny. It would be a great pity if that were ever to happen, while he would no doubt celebrate his vindication. My only bias is against those who constantly talk down the economy, particularly from a distance.

More good news for the economy with the purchasing managers' index for the service sector up from 54 in December to 56 in January, a 10-month high.

This is what Markit said:

"The UK service sector started 2012 in positive fashion with activity and new business both rising at marked and accelerated rates. Business confidence showed the largest one-month gain in the survey history, while employment was increased to the greatest degree in nearly four years.

"On the price front, input cost inflation eased to the lowest for 14 months while output charges were again little changed.

"January’s headline Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – improved to a 10-month peak of 56.0. That was a rise from 54.0 in December and represented a third consecutive monthly improvement in the index (the best run for over two years)."

The purchasing managers' index for manufacturing in January is strong and, in the circumstances, rather surprising. The index rose from 49.7 in December to 52.1 in January, pointing clearly to a resumption of the sector's expansion. Adding to the good news was the sharpest fall in input prices for more than two years. Maybe we wrote manufacturing off too soon.

This was Markit's verdict: "The UK manufacturing sector started 2012 on a positive footing. Output expanded at the fastest pace since last March, new orders rose following a period of contraction and payroll numbers stabilised. Cost pressures continued to ease, as average input prices fell for the third straight month."

Jonathan Portes of the National Institute of Economic and Social Research asked me what I meant by 'Keynesian'. Jonathan's post is here, and there is an interesting one here from Simon Wren-Lewis. This is what I said:

The National Institute was founded in 1938, so I suppose strictly speaking "taking its back to its Keynesian roots" implies taking it back to the economics of Keynes, rather than post-war Keynesian economics, which David Colander many years ago described as Lernerian rather than Keynesian.

What is Keynesian economics? In Britain it was common to think of it as the 1950s and 1960s belief in fiscal fine-tuning, and the primacy of fiscal over monetary policy, buried in the 1970s by stagflation and the rise of monetarism, and encapsulated in the Jim Callaghan/Peter Jay 1976 speech to the Labour party conference.

What it means now is more difficult. Paul Samuelson famously wrote that all economists should think of themselves as post-Keynesians, "keen to render obsolete any theories that cannot meet the test of experience".

Do only Keynesians support an emergency fiscal stimulus in a crisis and deep recession? No. Robert Lucas was half -joking when he said he guessed everybody was a Keynesian in a foxhole, and it is true that some US economists were opposed. But support for the stimulus was pretty universal among the economic mainstream.

The IMF was criticised by some in the emerging world for abandoning the Washington orthodoxy, in which its standard prescription for developing economies in difficulty was fiscal austerity. Instead it supported a temporary fiscal stimulus, though with the proviso that countries should also put in place credible medium-term fiscal consolidation plans.

Is it Keynesian to call for a slowdown in the pace of those consolidation plans? A lot of this gets mixed up in the nonsense over "expansionary fiscal contraction". Every UK recovery from the 1970s has been accompanied by a significant fiscal consolidation. Would those recoveries have been stronger without the fiscal consolidation? Initially, certainly yes. This time, also yes, as I pointed out last May:

"Let me adjudicate. Summers says he would be astonished if Britain boomed over the next two years and so would everybody else. He has set up a straw man.

"As for the free marketeers, it is true that over time the private sector will expand into the space left by a smaller state. But in the short-term, in an economy when bank finance is scarce, growth will be slower than without cuts. As I say, Britain had little choice but to get the deficit down."

So is it Keynesian to say that, given the size of the deficit, the government should slow the pace of fiscal consolidation? Going back to where we started and Keynes, we cannot say, but I am not sure this would have been Keynes's view. Robert Skidelsky might argue otherwise.

But it is Keynesian in the sense that if you believe the fiscal multipliers are big enough, that Ricardian equivalence is a myth or greatly exaggerated and that there are no adverse consequences from the potential loss of fiscal credibility - which, as I have said, is the main reason why gilt yields are so low and the AAA rating still intact - you should slow the pace of consolidation or even put it into reverse? Yes, though this may be unfair to some Keynesians.

The 0.2% drop in gross domestic product inn the fourth quarter of 2011 was disappointing, but probably no more than that. It did not change estimates for growth in 2011 of 0.9% (1.4% excluding North Sea oil and gas) and was broadly in line with expectations.

The service sector was flat in the fourth quarter, which looks to be a number likely to be revised upwards looking at the surveys, while industrial production was down by 1.2%. Included in this was a huge quarterly fall, 4.1%, in electricity and gas supply, reflecting the mild weather.

Given this, the possible effects of the November 30 public sector strike and the likely upward revision of these figures when more data comes in, we should not worry too much about these figures, which are here.

This is particularly the case when you look at an upbeat CBI manufacturing survey, the highlight of which was: "In the next three months, manufacturers expect output to rise modestly, with a balance of +15%." If manufacturing avoids a drop in the first quarter of 2012, so will the wider economy.

The Bank of England's minutes showed a unanimous vote in favour of unchanged policy, and an interesting debate:

"For some members, the risks of undershooting the target meant that a further expansion of asset purchases was likely to be required. Some of those members also noted a downside risk to inflation arising from the possibility that the reduction in the economy’s supply potential following the recession had been less, and hence spare capacity greater, than assumed in the Inflation Report. But there was no compelling need to increase the scale of the programme of asset purchases before completing those already announced.

"For other members, the risks to inflation were more finely balanced and it was less clear that inflation would fall below the target in the medium term. Annualised three-month inflation rates were still above the target. Looking ahead, particular concerns included: the risk of price pressures from firms seeking to increase margins; and the fact that even if wage growth were to remain subdued, wages might add to inflationary pressures if productivity growth were also weak."

More QE is likely in February but by no means guaranteed. The minutes are here.

The International Monetary Fund has revised down its growth forecast for 2012 to 3.3%, from 4% in September, and its 2013 forecast from 4.5% to 3.9%. To be fair, its earlier forecasts looked a little rosy, though the global economy grew by a very impressive 5.2% in 2010 before slowing to 3.8% in 2011.

According to the IMF: "The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere. Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated.

"Global output is projected to expand by 3¼ percent in 2012 —a downward revision of about ¾ percentage point relative to the September 2011 World Economic Outlook (WEO). This is largely because the euro area economy is now expected to go into a mild recession in 2012 as a result of the rise in sovereign yields, the effects of bank deleveraging on the real economy, and the impact of additional fiscal consolidation."

It predicts that Britain will grow by 0.6% in 2012, a downward revision from 1.6% in September. There will be a debate over this: "In the near term, sufficient fiscal adjustment is in motion in most advanced economies. Countries should let automatic stabilizers operate freely for as long as they can readily finance higher deficits. Among those countries, those with very low interest rates or other factors that create adequate fiscal space, including some in the euro area, should reconsider the pace of near-term fiscal consolidation."

The update is here

Public sector net borrowing was £13.7 billion last month, down from £15.9 billion a year earlier. The current budget deficit was £10.8 billion, down from £13.3 billion in December 2010. Upward revisions to earlier data mean that cumulative borrowing for the first nine months of the fiscal year, £103.3 billion, was below the £114.6 billion recorded in the corresponding period of 2010-11. So borrowing will be lower this year, but the difference will not be massive.

Will it undershoot the Office for Budget Responsibility's revised borrowing figure of £127 billion for the current fiscal year? I think so, and I thought the upward revision from £122 billion in November was unnecessary. But we'll see. The OBR's analysis, here, points out that borrowing will need to be £2.3 billion higher than a year earlier for the final three months for the target to be hit. It expects government spending to come in stronger and VAT and bonus-related taxes to be weaker.

The Office for National Statistics highlighted the fact that public sector net debt rose above £1 trillion for the first time.

Jonathan Portes, director of the National Institute of Economic and Social Research (Niesr), has published a lively rejoinder to my piece yesterday on his blog, here, in which he suggests I tie myself "up in all sorts of knots".

Jonathan's also a bit sensitive about my suggestion that he has taken Niesr back to its Keynesian roots: he says he doesn't really think of himself as a Keynesian and hasn't changed its policy position. The argument I set out on Sunday was, I thought, very straightforward.

If you thought Britain's very low gilt yields were "just as in Japan — a sign of economic failure, not success", as Jonathan originally wrote, then you would expect that the markets were anticipating a long period of economic stagnation and deflation for Britain, as in Japan. They are not, and neither is the National Institute, barring a very big change in its forecasts in the next week or so.

The markets do expect Bank rate to stay low, as he says, but that is rather a different point. The Bank of England, and other central banks, have decided that the appropriate response to the aftermath of a banking crisis is to keep official interest rates low, and the expectation is that they will continue to do so even as the recovery strengthens. One of the arguments for doing so in Britain, of course, is that fiscal policy is being tightened. I'm not at all sure this is a sign of economic failure, merely a reflection of banking and financial conditions. Sir Mervyn King has made clear that a key factor keeping rates low is the health (or lack of it) of the banking system.

This, by the way, is in contrast to the response of the Japanese authorities. Zero rates only came in in Japan once deflation had taken hold. The response of the Bank of Japan to the bursting of its bubble economy two decades ago was to raise interest rates, not lower them. It was one of the lessons we have learned from the Japanese experience.

Why shouldn't the government take advantage of low gilt yields and borrow to stimulate the economy, as Jonathan suggests? Because, in my view, these things are a lot more finely-balanced than he allows. A Plan B fiscal stimulus would be seen by the markets and the ratings agencies as a powerful indication that the government was giving up on its fiscal strategy. Given how close the government came to breaking its fiscal rules in the Autumn Statement, it is hard to see the Office for Budget Responsibility looking benignly on any such policy shift. You can argue that none of this matters. In the real world, however, it does.

So, there should be no confusion. And if you want to draw a comparison with another country that has low government bond yields, why not Germany?

PS Jonathan has responded to my response on his website and appears to not know the difference between short-term and long-term interest rates. Very strange. My point was that, even if you accept his explanation for very low rates - that Bank rate will stay low - this does not imply Japanese-style stagnation and deflation. And it is perfectly possible for a country to have a low policy rate but very high government bond yields. Look at several eurozone members. Britain's low gilt yields reflect, as he has conceded, market confidence in the credibility of the government's fiscal plans.

Retail sales were surprisingly buoyant in December, rising by 0.6% on the month in volume terms both including and excluding sales of automotive fuel. This was a strong result. Sales value was up by 6.2% in December compared with a year earlier, while volumes were up by 2.6%.

Though this was helped by base effects (December 2010's snows) it suggests demand was unexpectedly strong in the run-up to Christmas 2011, despite mild weather being unhelpful to clothing retailers. Volumes in the fourth quarter showed a rise of 1.1% compared with the third, which should have provided some support to gross domestic product. More here.

All the headlines on the labour market statistics will be bad, but the picture is rather more nuanced. Undoubtedly bad was the 118,000 rise in the Labour Force Survey measure of unemployment to 2.68 million or 8.4% of the workforce in the September-November period.

As the Office for National Statistics says: "The unemployment rate has not been higher since 1995 and the number of unemployed people has not been higher since 1994."

More reassuring was the small, 1,200, rise in the claimant count in December to just under 1.6 million. With downward revisions in earlier months, the claimant count has been essentially flat for four months. Also on the plus side, the inactivity rate for 16-64 year-olds fell from 23.3% to 23.1%, representing a drop of 61,000.

The rise in youth unemployment looks to be mainly a full-time student phenomenon. Excluding them, there was an increase of just 8,000 over the latsst three months. Including them, there was a rise of 52,000.

Pay remains subdued, average earnings rising by just 1.9% - still well below the rate of inflation. More here.

The fact that the fall in inflation in December, from 4.8% to 4.2%, was more or less in line with expectations does not mean it was unwelcome. We went through a period of many months when inflation came in well above expectations and the Bank of England looked to be in danger of losing control of it.

At 4.2% of course, inflation is still more than double the official target and RPI inflation only came down from 5.2% to 4.8%. The squeeze on real income remains. There are reasons, however, to expect it to ease in the coming months, including the January 2011 VAT hike dropping out of the comparison and lower household energy prices. More here.

This is what I wrote about the government's child benefit plans on October 10 2010:

It was brave for the Tories to attack last week one of the welfare state’s sacred cows, risking the wrath of its own supporters in middle England and demonstrating that the pain of the cuts will reach up the income scale.

What there was no excuse for, however, was announcing the change in such a cackhanded way. One characteristic of the Conservative team in opposition was the effort it put in to ensure external experts backed its numbers.

Perhaps it was the pressures of office, or of putting together the chancellor’s party conference speech in haste. Perhaps, to take the Machiavellian interpretation, the chancellor’s deliberate intention was to generate maximum anger in the short-term in return for long-term gains.

That is too generous. Something went badly wrong. You did not have to be a tax expert to spot the immediate double-income flaw in the crude removal of child benefit for higher rate taxpayers - two parents earning £40,000 each get it, a single earning parent on £44,000 does not.

It was predictable that the Institute for Fiscal Studies would warn that the move “seriously distorts incentives” for families with main earners. Nobody would know this better than Rupert Harrison, George Osborne’s special adviser, who used to work at the IFS.

So the episode is puzzling, and potentially worrying, though the Treasury has time, until 2013, to straighten it out.

They call producer price inflation pipeline inflation and the latest figures suggest a fall in inflation is firmly in the pipeline. Output prices of manufactured products fell by 0.2% between November and December, their first drop since June 2010.

Overall, output price inflation fell from 5.4% in November to 4.8% in December, its lowest for a year. Input prices also fell between November and Decemvber, by 0.6%, and the rate fell dramatically, from 13.6% to 8.7%. This offers a good prospect of a significant and sustained fall in consumer price inflation. The Bank of England will be relieved. More here.

However many special factors you cite, the picture for industry in Britain is not good. Overall industrial production in November was down by 3.1% on a year earlier, while manufacturing fell by 0.6%. Between October and November overall industrial production dropped by 0.6% while manufacturing slipped by 0.2%.

The weakness of industrial production particularly reflects weak mining and quarrying output, including North Sea, down 14.6% over 12 months, and energy supply, partly reflecting mild weather, down 8.6%. But the performance of manufacturing is also disappointing.

As for the fourth quarter arithmetic, industrial production in October-November was 1.2% down on its third quarter average. Achieving any growth in gross domestic product in this context will be very difficult. More here.

The British Retail Consortium, for all its warnings, reported that retail sales in December were 4.1% up on a year earlier, and 2.2% higher on a like-for-like basis. Though the comparisons are helped by December 2010's snows and while they do not imply volume increases - the figures are for sales values - they are significantly better than expected.

Food sales growth picked up strongly and non-food also improved, but with sales often promotion-led. Clothing and footwear showed good gains on last December's weak sales. Homewares improved but big-ticket items and furniture sales remained down on a year ago, hit by consumer caution.

Non-food non-store (internet, mail-order and phone) sales growth picked up sharply from November's low. Sales were 18.5% up on a year ago, double November's gain but similar to the 18.0% in December 2010.

The BRC does not expect it to last. Stephen Robertson, Director General, British Retail Consortium, said: "A better than hoped-for December closed a relentlessly tough year for retailers, but these figures hinged on a dazzling last pre-Christmas week and were boosted by some major one-off factors. We're not witnessing any fundamental change in customers' circumstances." More here.

The British Chambers of Commerce quarterly survey is slightly harder to read, since the organisation has used it as a lobbying exercise. It points to flat growth rather than a deterioration. More here.

All three purchasing managers' surveys have now surprised on the upside, with the service sector index up from 52.1 in November to 54 in December. This followed stronger-than-expected manufacturing and construction sector data. Markit, which produces the data, says December's bounce won't prevent a stagnant fourth quarter.

Even that, however, which may be cautious, is better than it looked a couple of weeks ago. The service sector PMI can be accessed here.

The Office for National Statistics, in presenting the latest (Q3 2011) productivity figures, chooses to emphasise the output per hour measure, which showed a modest rise of just 0.2%. Within the data, however, there was also a very strong, 1.2%, rise in output per worker and output per job.

This was the counterpart to the big drop in employment in the quarter and the rise of 0.5% in GDP. It may be a one-off but could also indicate that productivity, after being unusually subdued, is finally getting back in gear. The release is here.

Also released, figures showing that British companies are doing rather well. The net rate of return for non-financial companies in Q3 2011 was 12.9%, the highest since Q3 2008 - the eve of the worst phase of the financial crisis - though disturbingly, the rate of return in manufacturing was just 5%. More here.

Everybody expected a downbeat reading from the UK manufacturing purchasing managers' index but it provided a new year boost by surprising on the upside. The index rose from 47.7 in November to 49.6 in December, just below the 50 level consistent with expansion.

Markit, which compiles the data, describes it as stabilisation rather than growth. These days maybe stabilisation is the new growth.

It said: "The UK manufacturing sector showed signs of stabilisation at the end of 2011. Production was broadly unchanged in December, following back-to-back contractions, and the rate of decline in new orders slowed as the trend in new exports strengthened.

"Weakness was mainly centred on the intermediate goods sector, as growth of output and new orders was recorded at both consumer and investment goods producers." Its release is here.

House prices slipped by 0.2% in December but rose by 1% during the whole of 2011 according to the Nationwide Building Society. Prices rose in 9 out of 13 UK regions. Though the price rise was small, and represents a real drop in relation to both earnings and (more especially) inflation, it shows quite a degree of resilience in the market. More here.

Meanwhile, housing equity withdrawal continued to reverse (i.e. there was a net injection), by £8.6 billion in the third quarter, following £9.6 billion in the second. Nothing better illustrates the housng turnround than that. Details here.

At first blush the revised third quarter gross domestic product figures were good news, with GDP growth over the quarter revised up from 0.5% to 0.6%. Dig slightly deeper, however, and the third quarter's gain is the second's loss - that has now been revised down from 0.1% to zero.

In the third quarter itself, output of the production industries rose by 0.2% (manufacturing 0.1%), the service sector rose by 0.7% and construction by 0.3%. GDP compared with a year earlier was up by a weak 0.5%, so no change there.

There was better news for business investment, up by 0.3% on the quarter and 4.3% on a year earlier. But the current account deficit in the third quarter, £15.2 billion, was the biggest on record and equivalent to 4% of GDP. The second quarter's tiny £2 billion deficit was revised up to £7.4 billion.

So a mixed bag - you win some, you lose some. The GDP figures are here.

November's public borrowing figures were pretty good, with public sector net borrowing of £18.1 billion versus £20.4 billion a year ago. Cumulative borrowing for the April-November period (the first eight months of the fiscal year) was £88.3 billion, versus £98.7 billion.

Did the Office for Budget Responsibility jump the gun in raising this year's borrowing forecast to £127 billion in the autumn statement? I suspect it did, though its analysis is based on higher 'back-loaded' spending in the final four months of the fiscal year. We'll see. Its analysis is here.

Retail sales fell by 0.4% in volume terms in November, and by 0.7% excluding petrol and diesel sales. They were up by 0.7% in the latest three months compared with the previous three, and by 0.7% also in November compared with a year earlier.

The value figures, up 4.6% year-on-year, again suggest Britain would be enjoying surprising strength in retail sales if not for high inflation. Maybe, however, people are having to spend on essentials, high prices or not. Given the mild weather in November, you might expect clothing retailers to be doing a lot worse than their 0.1% volume rise compared with a year earlier. Many more details here.

As unemployment releases go, this was not as bad as a month ago. The claimant count rose by just 3,000 to 1.6m, while the Labour Force Survey measure rose from 2.62m to 2.64m, though this was enough to push the rate to 8.3% (August-October), from 7.9% in the previous three months. Youth unemployment was steady at just over 1m.

Broadly speaking, the drop in public sector employment and the rise in private sector jobs have offset each other over the past 12 months, leaving a net fall in employment of 14,000. This is not as healthy as earlier, when private sector job creation was easily outstripping public sector losses. But there have been more public sector job cuts than expected.

This is the employment picture: "The number of people in employment aged 16 and over fell by 63,000 on the quarter and by 14,000 on the year to reach 29.11 million. The number of employees fell by 252,000 over the quarter to reach 24.77 million. The number of self-employed people increased by 166,000 on the quarter to reach 4.14 million. This is the highest number of self-employed people since comparable records began in 1992."

That strong rise in self-employment is surprising. More here.

Consumer price inflation fell from 5% in October to 4.8% in November, RPI inflation from 5.4% to 5.2%. It is falling, though perhaps not as fast as some might have hoped, and should receive a big downward kick next year, particularly when January's VAT hike drops out of the 12-month comparison.

As importantly, some of the most visible price pressures are starting to ease. According to the Office for National Statistics: "The largest downward pressures to the change in CPI annual inflation between October and November came from food, petrol, clothing and furniture, household equipment & maintenance."

The fall in inflation should happen faster than the rise in unemployment, easing the misery index. The inflation release is here.

Good news on Britain's overseas trade is there to be cherished but the sharp drop in the goods and services deficit between September and October, from £4.3 billion to £1.6 billion, looks a bit too erratic to be true. Adjusted exports rose by 9% to record levels while imports fell by 1.5%. Despite the scepticism, an underlying improvement is occurring. More here.

All the attention in Britain this morning is on David Cameron's veto and the reality of a two-speed Europe, with Britain in the slow/outer lane. Though that was inevitable given that the focus was on rescuing and more tightly binding eurozone members, it is a shift. Some would say such a shift requires a referendum.

What about the euro deal? There will be more fiscal discipline, which in time will help the euro, if it gets to that point. The challenge is to get from here to there, with deep austerity measures and the urgent need to restore competitiveness. This journey will have to be acccomplished without a European Central Bank bazooka to help clear the path, if we take Mario Draghi, its president, at his word. So, only half the deal the markets were looking for.

The Bank of England's monetary policy committee left Bank rate unchanged at 0.5% and the amount of quantitative easing at £275 billion. It said the existing programme (the additional £75 billion) will take another two months to complete. So Bank rate has remain unchanged in 2011, as it did in 2010. Another year of unchanged rates in 2012?

Both manufacturing and overall industrial production fell by 0.7% between September and October and, given the message from the surveys, things do not bode well for the rest of the fourth quarter. The service sector is growing but manufacturing is contracting. It was supposed to be the other way around.

What does this mean for Q4 GDP? Overall industrial production, which is what matters, is down 0.2% over the latest three months. It appears to have been depressed by the weakness of energy production, goven the exceptionally mild autumn, which continued into November. We need a cold December. More here.

The purchasing managers' index for the service sector showed a welcome rise in November, up to 52.1 from 51.3 in October. Though this is consistent with only modest growth, it suggests the economy is holding up pretty well, given the huge uncertainty. Indeed, on this evidence, predictions of a drop in GDP in the fourth quarter may be unduly pessimistic. The release is here.

Having failed to spot the last one coming along, Sir Mervyn King is determined not to get caught out by this crisis. His opening statement at the launch of the Financial Stability Report is here.

Highlights include: "Many European governments are seeing the price of their bonds fall, undermining banks’ balance sheets. In response, banks, especially in the euro area, are selling assets and deleveraging. An erosion of confidence, lower asset prices and tighter credit conditions are further damaging the prospects for economic activity and will affect the ability of companies, households and governments to repay their debts. That, in turn, will weaken banks’ balance sheets further. This spiral is characteristic of a systemic crisis.

"Tackling the symptoms of the crisis without resolving the underlying causes, by measures such as providing liquidity to banks or sovereigns, offers only short-term relief. Ultimately, governments will have to confront the underlying causes. A loss of external competitiveness in some euro-area countries has led to current account imbalances and large build-ups of private and public debt, much of it external. The problems in the euro area are part of the wider imbalances in the world economy. The end result of such imbalances is a refusal by the private sector to continue financing deficits, as the ability of borrowers to repay is called into question."

The full report is accessible here.

The Institute for Fiscal Studies' assessments of Budgets and Autumn Statements is always worth reading and the latest is available here.

The IFS settles one argument - that borrowing and debt would be higher under Labour: "With the worse economic outlook, their slower fiscal squeeze – with smaller tax rises and less deep spending cuts – would, if it had been implemented, now of course have implied even higher debt levels over this parliament than those we will in fact see. That would have left an even bigger job to do in the next parliament."

The headlines, however, will be attracted by this: "Again we are running out of superlatives to describe just how extraordinary are some of these changes. Our own estimates suggest that real median household incomes will be no higher in 2015–16 than they were in 2002–03, more than a decade without any increase in living standards for those in the middle of the income distribution. We estimate that in the period 2009-10 to 2012-13 real median household incomes will drop by a whopping 7.4% - another record matched only by the falls seen between 1974 and 1977."

Perhaps George Osborne had reason to be grateful to the OECD for its pre Autumn Statement forecast. Certainly he had reason to be grateful to his advisers for getting his growth measures, including credit easing for small and medium-sized firms and a planned additional £30 billion of infrastructure spending out there before the gloom descended.

For gloom there is in spades and it goes beyond mere growth revisions, though they were unwelcome. There were four aspects to the Office for Budget Responsibility's downbeat assessment:

* Growth in 2011 will be just 0.9%, compared with 1.7% in March, slowing further to only 0.7% in 2012, down from 2.5%. GDP is declining by 0.1% this quarter, rising 0.1% the next, but remaining subdued through 2012.

* The economy's productive potential is less than it was, meaning it will be 3.5% smaller in 2016 than the OBR thought in March. Every 1% of GDP is about £15 billion, so add it up. In total, the economy will be 13% smaller in 2016 than if the Treasury's spring 2008 forecast had been right.

* This has direct knock-on effects for borrowing. Public borrowing is revised up every year, from £122 billion to £127 billion this year (8.4% of GDP), and from £29 billion (1.5% of GDP) to £53 billion (2.9% of GDP) in 2015-16.

* Because more of the budget deficit is now thought to be structural rather than cyclical, Osborne only meets his fiscal target in 2016-17 - eliminating the current structural budget deficit, two years later than in March, and only does so by going beyond just a real freeze on spending in 2015-16 and 2016-17; cutting total managed expenditure by 0.9% in real terms each year; beyond the next election.

A few things to highlight the grim picture. This year's 2.3% fall in real household incomes is the biggest in the post-war era, and will be followed by a further smaller fall (0.3%) this year. There will be 710,000 public sector job losses by 2017 according to the OBR, compared with 400,000 to 2016 in March.

Not only that, but only by rolling his fiscal target forward does Osborne meet it. The original aim was to eliminate the structural budget deficit in this parliament. That will not now be achieved. These rolling targets are a moveable feast, as we discovered under Gordon Brown.

It is, of course, ridiculous to compare the pre-budget projections the OBR made in June 2010 with these latest numbers. Alistair Darling did his best in difficult circumstances from 2007 to 2010 and would have liked to have done a pre-election comprehensive spending review.

He was not, however, allowed to, so his "plans" were merely a sketch. He too, had he remained in office, would have been affected by highly unfavourable headwinds. We cannot know precisely what would have happened to debt and the deficit under Labour - it is possible a fiscal crisis would have forced even greater austerity. In the absence of that, however, borrowing would have been higher, Osborne, using Treasury (not OBR) calculations says cumulative borrowing would have been £100 billion higher under Labour.

That will not, of course, settle the "Plan A/Plan B" debate. One result of the Autumn Statement is that it will run to, and probably now beyond, the next election.

We should be clear that the OECD's new projections, if they turn out to be true, will not count as a dip back into recession in Britain. The 0.1% annualised decline in GDP it projects this quarter, 0.025% for the quarter itself, would be recorded by the Office for National Statistics as flat. The 0.6% annualised decline in the first quarter of 2012 is bigger, but equivalent to 0.15% as the ONS would record it. Flat rather than recessionary. The numbers are here.

The OECD's main message is an urgent call for eurozone leaders to get to grips with their crisis.

A billion here, a billion there, and soon you are talking about real money. The potential £40 billion the Treasury is talking about for credit easing - over it looks like four years - can be added to some £30 billion in extra infrastructure spending, much of it from institutions and sovereign wealth funds, probably over 10 years. All will be revealed in tomorrow's Autumn Statement.

It sounds like a lot of money, but £70 billion spread out in this way - say £10 billion plus £3 billion a year over the next four years - is somewhat less than 1% of annual gross domestic product. The hope that both will give more bang for the buck than their numbers suggest. But this is the chancellor signalling broad intent rather than providing a significant direct boost to economic activity.

Martin Weale, a member of the Bank of England's monetary policy committee, says in a speech that Britain's gross domestic product will take five-and-a-half years to get back to pre-crisis levels, compared with what would normally have been expected to be two. He blames weak productivity and, in particular, very low levels of consumer spending for this stage of the recovery. That could be because spending was simply too high before the recession. The speech is here.

GDP rose by 0.5% in the third quarter, according to the Office for National Statistics' second estimate. Preoduction, up 0.4% and the service sector, up 0.6%, drove growth. Both were a little weaker than in the first estimate but construction was revised higher. The interest, as always, is in the detail of these numbers. To take one, household spending was flat in the third quarter; less bad than recently. More here.

The Bank of England is into unanimity these days, voting 9-0 for more QE in October and by the same margin to leave Bank rate at 0.5% and the total of QE at £275 billion in November.

While the monetary policy committee expects inflation to fall sharply it also acknowledges the risk that it will stay high "as a result of companies rebuilding margins more aggressively than anticipated; a greater-than-expected response of wage growth to a gradual increase in productivity growth or to the past squeeze in real incomes; or expectations of above-target inflation becoming embedded in wages and price-setting."

That will be for later. this was its verdict this time: "The Committee noted that the existing programme of asset purchases would take a further three months to complete and market capacity made it difficult to increase the monthly rate of purchases substantially above what was already under way. During that time the Committee could gather evidence as to the impact of the purchases on asset prices and the real economy. It could also take account of events in the United Kingdom and abroad.

"Some members noted that the balance of risks to inflation in the November Inflation Report projections meant that a further expansion of the asset purchase programme might well become warranted in due course; anticipation of that might itself have an effect on asset prices and demand. Some other members judged that the risks to inflation around the target were more balanced." The minutes are here.

The assessment by the Institute for Fiscal Studies of the latest public finance numbers is here. Borrowing last month, £6.5 billion, was £1.2 billion lower than in October 2010. Within this, as the IFS points out, both revenues and spending were weaker than expected.

There is some uncertainty about what happens for the rest of the year. So far at least, however, the government appears broadly on track to meet the Office for Budget Responsibility's £122 billion borrowing forecast for 2011-12. There may even be a modest undershoot. The official release is here.

The government's housing strategy, announced by David Cameron and Nick Clegg, "will break the current cycle in which lenders won't lend, builders can't build and buyers can't buy. We'll be making it easier for people to secure mortgages on new homes, help people get on the property ladder, address unfairness in social housing and ensure homes that have been left empty for years are lived in once again."

If it does all those things it will be quite a significant success. The package, which can be accessed here, ticks most of the right boxes. The main doubts are about the scale of the plans and whether it will really unlock the main problem of the housing market, inadequate mortgage funding. To do that it will have to open up mortgage securitization again. It is not clear it will do that.

I set out the importance of housebuilding to the economy - and the recovery - a while ago, in this piece.

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

It was not the rise in youth unemployment to more than 1m last week which shocked me. It has been predicted so long its arrival had lost the capacity to surprise. I shall return to that in a moment.

No, it was another number from the Office for National Statistics (ONS). In the July-September period, the number of employees in Britain fell by 305,000.
That is a big number. So big, in fact, that it was, as the ONS said, “the largest quarterly fall in the number of employees since comparable records began in 1992”.

In the latest three months. in other words, there was a bigger fall in employees than during the 2008-9 recession (the worst in the post-war era) or for that matter any other three-month period in the past two decades; when the curren labour market series began.

The fall in employment - 197,000 - was somewhat smaller but mainly because the ranks of the self-employed apparently swelled by 100,000 over the summer and early autumn.

I think we are entitled to be a little bit suspicious of this 100,000. If self-employment soars at a time when firms are cutting back sharply on jobs, it probably does not tell us there has been a sudden outbreak of entrepreneurialism.

Instead, it is likely to be involuntary self-employment: people doing consultancy or freelance work, working for themselves, having lost or being unable to find a job.

The big picture is of a labour market, having behaved itself well in recent years, taking a dive. Unemployment, apparently stuck at 2.5m, is now 2.62m and rising.

Britain’s unemployment rate, having been a couple of percentage points - at least - below eurozone and American levels, is now 8.3%. It is rising at a time when US unemployment may be about to embark on a sustained fall.

So what explains this sudden deterioration? A very silly political debate has been running about whether to blame Britain’s disappointing growth performance on the eurozone crisis or on other factors.

The fact is that the weak recovery, and by extension a weak job market, has many authors. It reflects the banking hangover and weak bank lending (particularly as the Engineering Employers Federation points out, to small manufacturing firms). It reflects high inflation and the intense squeeze, which persists, on real incomes.

It undoubtedly reflects the government’s fiscal tightening, as it would have reflected Alistair Darling’s tightening (deep spending cuts and National Insurance and income tax hikes) had Labour retained power last year.

It is inconceivable, however, that it does not also reflect a eurozone crisis that has been running since May last year and intensified in the spring of this year. That was when Portugal had to be rescued and serious talk emerged of a Greek default and possible exit. It was also when Britain’s exports to the rest of the European Union, in volume terms, began to fall.

The eurozone crisis reached panic proportions in the summer. It provides at least a partial explanation, along with the August riots, of why employment took such a dive. Given the huge monthly and daily turnover in the job market, firms have only to stop recruiting for there to be a drop in the number of employees.

For a full explanation of what has been happening, however, it is necessary to look at the mentality of employers. The surprise, over the past year or so, has been strongly rising private sector employment, alongside a drop in the number of public sector jobs.

In the year to June, for example, public sector jobs fell by 240,000, while private sector employment rose by 264,000. We do not yet have a public-private breakdown for the third quarter, but the scale of the fall suggests both public and private employers cut back agressively.

Public sector job cuts are easy to explain, though they appear to be occurring at a far faster rate and in much greater numbers than the independent Office for Budget Responsibility expected.

As for the private sector, the fact that employment fell by less than expected in the recession (and in previous recessions) and has risen quite strongly - until now - in the recovery, is part of the same general story. Firms have been betting on recovery.

They did not want to get rid of workers only to have to hire them again when things picked up. They were keen to recruit, so as to be well placed as the recovery built up momentum.

So what we have seen in recent months, I fear, is capitulation on both fronts. Businesses that hoarded labour have come to regret it and are now throwing in the towel. Those that recruited are no longer doing so and in some cases are laying people off. Confidence in the recovery has evaporated, and with it the hopes for many in the job market. The crisis in the eurozone has contributed to that.

Can it be turned round? Every business I meet talks of not knowing what will come next. Until firms feel more secure, more bad news on jobs is inevitable. They need to feel more secure about recovery.

Which brings me to youth unemployment and the breaching of the 1m barrier. It is interesting to me that a rise from 269,000 to 286,000 in the number of full-time students seeking work was enough to push the total above 1m.

It is also interesting - and worth bearing in mind next time you are resisting the urge to attack the television when you see Ed Balls or Ed Miliband talking about their plan for jobs and growth - that youth unemployment rose by nearly 200,000 between 2001 and 2007 when the economy was growing well.

Young people are suffering from a cyclical but also a structural problem. They have been losing out in compeition with migrant workers but they have also been hurt by the minimum wage, high employment and training costs and mismatches betwen their skills and what organisations are looking for This is not, in other words, a short-term problem.

Employers need more of an incentive to take them on. It remains to be seen whether the November 29 autumn statement tries to offer one.

Retail sales volumes rose by a strong 0.6% in October, following a 0.5% increase in September. This was in spite of a drop in consumer confidence to a new low. Sales volumes were up by 0.9% on a year earlier, while values rose by 5.4%. In the absence of inflation, in other words, sales volumes would have been very strong. The release is here.

The markets' interpretation of the November inflation report is that it opens the way to more quantitative easing, perhaps £100 billion or more extra, though the Governor said the case for doing it would be reviewed from month to month.

Uncertainty is the buzzword in this report. Uncertainty about the eurozone - so big in the case of "extreme outcomes" that the Bank can't attempt to quantify it. Uncertainty too about inflation, though the Bank is more convinced than ever it will fall sharply next year and beyond. Let's hope this is right - it can't afford to get it wrong again.

Growth will be about 1% next year, on the assumption that there is some kind of resolution to the euro crisis over the next few months. The fact that Sir Mervyn King can't envisage what that resolution might be - or at least can't talk publicly about it - is concerning.

So no growth until the middle of next year, a further rise in unemployment and an economy that is infinitely more subdued than the Bank thought even recently. Not good news. The report is here.

A nasty set of unemployment numbers, with employment down 197,000 in the July-September quarter and unemployment up 129,000. The unemployment rate, 8.3%, is the highest since 1996. Youth unemployment is at 1.02m. A troubling set of figures, with unemployment at 2.62 million and no doubt worse to come. More here.

Not too much to write home about in the inflation numbers. Consumer price inflation edged down from 5.2% to 5%, while retail price inflation dropped from 5.6% to 5.4%. These remain high numbers.

According to the Office for National Statistics: "The largest downward pressures to the change in CPI annual inflation between September and October came from falls in the cost of food (due to significant and widespread discounting by supermarkets and good harvests for certain produce), air fares and petrol.

"The largest upward pressures to the change in CPI annual inflation between September and October came from increases in the cost of clothing, electricity and gas." More details here. Still a long way from the 2% target but at least moving in the right direction.

Some better news on the construction sector, which could change the growth story for the past 12 months slightly. In the third quarter output declined by 0.2% but there were upward revisions for the fourth quarter of last year and the first and second quarters of this year.

The revisions, 0.3% in Q4 2010, 0.8% in Q1 2011 and 1.5% in Q2 2011, should add a small amount to growth. Not much, maybe 0.1 percentage points in Q2, but better than nothing. The release is here.

There was some speculation ahead of the Bank of England's November meeting that it would either add to the additional £75 billion of quantitative easing or cut Bank rate to 0.25%. In the event it did neither, so all eyes are on next Wednesday's inflation report. Its statement is here.

Manufacturing output rose by 0.2% between August and September and was 2% higher than a year earlier. Overall industrial production was flat in September and down 0.7% on a year earlier. So not much happening and, in fact, the 0.4% rise in industrial production in the third quarter was marginally lower than the 0.5% assumed for the GDP figures, though probably not large enough to lead to a revision of the data. More here.

Just a few months ago the European Central Bank appeared to be the only advanced country central bank appropriately concerned about inflation. Now, three months after the eurozone crisis broke violently back out into the open, it has cut its main refinancing rate from 1.5% to 1.25%.

The decision, at the first meeting to be chaired by its new president Mario Draghi, was welcome. But, just as in 2008, the ECB has found itself wrongfooted by events. However, as its new president has said, the big decisions now lie with governments.

Unusually, the third quarter gross domestic product numbers contained no huge surprises - good or bad - the third quarter rise of 0.5% being broadly in line with expectations and broadly acceptable.

Though growth over the past 12 months has been a modest 0.5%, growth through the year gives a better picture of an economy growing quite modestly, at a 1% to 1.5% rate.

The third quarter numbers were boosted by a 0.7% rise in service sector output and a 0.5% rise in industrial production. But construction output fell by 0.6%,

Of course with the eurozone threatening to implode and the manufacturing purchasing managers' index in October dropping sharply to 47.4, there are bigger issues out there. The GDP figures are here.

It wasn't quite the grand plan that was being talked about at the IMF meetings a few weeks ago, and the beefing up of the European Financial Stability Facility is about half what Timothy Geithner said was needed. But the market response to the overnight deal in Brussels was positive and the consensus among analysts is that it was enough to calm markets.

The three-point plan consisted of:

* A voluntary increase in the "haircut" on Greek debt to 50%, easing Greece's debt burden.

* An agreement to recapitalise EU banks by 106 billion euros, taking their Tier 1 capital ratios to 9%. Spanish banks will account for a quarter of this recapitalisation (26.2 billion), followed by Italian banks (14.8 billion).

* An increase in the firepower of the EFSF to 1 trillion euros (from 440 billion), which will include the possibility of a direct input from China. Nicolas Sarkozy is to seek Chinese assistance.

According to Societe Generale: To our minds, this is likely to prove sufficient to ease financial stress and give the euro area a “window of opportunity” to put its house in order." That looks about right.

The run of mildly encouraging surveys appears to have stopped if the CBI's latest industrial trends survey is anything to go by. It says:

"Sentiment has deteriorated sharply among UK manufacturers, in anticipation of significant falls in activity over the next three months, the CBI said today.

"Manufacturing orders and output are expected to fall over the next quarter, following modest rises in domestic demand and production over the past three months. Firms are also predicting a run-down of their stock holdings.

"Sentiment about both the general business situation and export prospects fell for the second consecutive quarter, with net balances of -30% and -24% of firms reporting that they were less optimistic than three months ago. The falls in sentiment were the sharpest since April 2009."

Export balances are above their long-run averages, in spite of the eurozone crisis, but companies are being held back by the lack of availability of export credit. More here.

After yesterday's better than expected retail sales figures, more good news. Public borrowing in September was £14.1 billion, £1.3 billion down on a year earlier. Cumulative borrowing, at £63.5 billion, compares with £71 billion in the corresponding period of 2010-11.

Last year's outturn was £136 billion. This year's forecast from the Office for Budget Responsibility is £122 billion. As things stand, it is on track. More here.

Retail sales rose by 0.6% (volume) and 0.8% (value) in September, stronger than expected. The value of sales in September was 5.4% up in September 2010. The volume of sales was up by 0.6% on September 2010, showing the impact on sales volumes of high inflation.

Interesting detail in the release includes the following: Non-store retailing and automotive fuel both saw sales volumes increase compared to September 2010 by 15.5% and 2.8% respectively. Textile, clothing and footwear sales volumes fell 2.1% compared to September 2010, the largest fall since April 2008.

Despite the bounce in September, sales volumes in the latest three months were down by 0.2% on the previous three months. More here.

Following Mervyn King's downbeat overnight speech here, the Bank's October minutes were also downbeat, with a unanimous 9-0 vote in favour of £75 billion of additional quantititaive easing. Though this was in line with market expectations ahead of the publication of the minutes, it was a long way from what most analysts expected ahead of the vote two weeks ago.

There are some oddities in the minutes. In paragraph 16 they refer to consumer confidence being at its weakest since March 2009 and expectations about household finances being lower than at any time since November 1992. Then in the next paragraph they talk about the slowdown being driven by external factors.

The overall message, however, is clear: "While the stimulatory monetary stance and present level of sterling should help to support demand, the weaker outlook for, and the increased downside risks to, output growth meant that the margin of slack in the economy would probably be greater and more persistent than previously thought. This made it more likely that inflation would undershoot the 2% target in the medium term, without further monetary stimulus."

I think this is growth targeting, dressed up as an inflation and spare capacity argument. Judge for yourself in the minutes, here.

The bald headlines for inflation are bad, and there is not a lot of comfort in the detail. With the unemployment rate at its highest for 15 years (17 in actual numbers unemployed), this may be a good time to revisit the misery index: unemployment plus inflation.

So, on inflation: CPI annual inflation stands at 5.2% in September 2011. CPI annual inflation has never been higher but was also 5.2% in September 2008

RPI annual inflation stands at 5.6% in September 2011, the highest it has been for over 20 years. The last time RPI annual inflation was higher was in June 1991 when it stood at 5.8%.

All I can say is that the Bank of England must have been desperately worried about growth, and very confident inflation will fall sharply to have launched another £75 billion of quantititive easing in this context. More here.

Just when it was needed, news of a better performance on Britain's overseas trade, with the deficit narrowing to £1.9 billion in August, from £2.3 billion in July and £3.6 billion in August 2010. It may be premature to talk of a rebalancing spurt but it is welcome.

This is the ONS's summary: "The UK’s deficit on seasonally adjusted trade in goods and services was £1.9 billion in August, compared with a deficit of £2.3 billion in July. The deficit on trade in goods was £7.8 billion, compared with a deficit of £8.2 billion in July. The surplus on trade in services was estimated at £5.9 billion, unchanged compared with July. The volume of seasonally adjusted exports of goods was 1.3 per cent higher, and the volume of imports was 0.3 per cent higher than in July. Export prices of goods fell by 1.5 per cent and import prices fell by 0.5 per cent compared with July." The release is here.

After being stuck at around 2.5m for the best part of two years, unemployment has started to rise quite strongly. There is a striking fall of 178,000 in employment in the latest three months (June to August), driven by a big drop (175,000) in part-time employment. As a result unemployment rose by 114,000 to 2.57m, or 8.1% of the workforce.

Youth (16-24) unemployment did not quite make it to 1m, instead hitting 991,000, 269,000 of which are in full-time employment. There are few bright spots in these figures. Total pay, including bonuses, rose by 2.8% over the latest 12 months but the excluding bonuses number remained depressed at 2.8%.

The claimant count rose by 17,500 to 1.6m, or 5%, in September. As a good lead indicator of future unemployment trends, it suggests the broader totals will continue to rise in the coming months. More here.

The National Institute of Economic and Social Research says GDP rose by 0.5% in the third quarter, following the release of industrial production figures for August. These showed manufacturing down by 0.3% but overall industrial production up 0.2%. Industrial production, which matters for GDP, was about 0.3% up on its Q2 average in August.

The National Institute is not popping the champagne corks. It says: "UK economic growth over the past year has been anaemic; the level of output is only 0.5 per cent higher than this time last year. The level of GDP is still 4 per cent below its pre-recession peak, suggesting that this recovery will be the weakest of any since the end of the First World War." Its release is here.

This is a useful guide, from the Nobel website, to the work of Thomas Sargent and Christopher Sims, winners of the Bank of Sweden Prize for Economics (the Nobel prize). Access it here, and you can also send congratulations to the winners.

Next to Adam Posen, David Miles has probably been the most enthusiastic advocate of quantitative easing on the Bank of England's monetary policy committee. In a speech tonight, apart from making the interesting point that the global financial crisis has lasted as long as the First World War, he also argues that QE can be as effective now as in 2009.

Though gilt yields are low, they can go lower, he argues, and the rise in bank funding costs and the deterioration in the economic news made the case for action. I don't agree but it is a good defence. The speech is here.

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

In the last few days we have had a big additional burst of £75 billion of quantitative easing from the Bank of England, backed up by Sir Mervyn King’s observation that this may be the “most serious financial crisis ever”. We also had, from George Osborne, a desire for credit easing but no hint of any fiscal easing.

Official statisticians have revised up the level of gross domestic product, while also saying the recession was deeper and the recovery weaker than previously thought. Puzzled?. All will become clear.

Let me start with quantitative easing (QE). For weeks I have been arguing against it, though never rising to the rhetorical heights of Ros Altmann, director general of Saga, who said it was “like launching the Titanic”. If you believe King, it was because of fear of Armageddon.

My arguments can be briefly summarised. This is not 2009, when the first £200 billion of QE was launched. King may know something we do not but September purchasing managers’ surveys suggest an economy that grew in the third quarter.

Inflation, meanwhile, is heading for 5% and, while the Bank says it will drop sharply, its record is poor. The Bank’s announcement pushed down the pound, which will push up inflation.

Most of all, it is questionable whether it will have much effect. The Bank, in its assessment of the programme so far, calculated that it boosted the economy by between 1.5% and 2% through a range of channels, including monetary effects and confidence. Many economists believe, however, the main route was via lower yields on government bonds (gilts).

When the Bank was contemplating QE last time, yields on 10-year gilts were close to 5%. Its decision last week was taken with yields at less than half of that, at 50-year low, and plainly with less scope to fall. The Bank may be firing blanks.

It has already told the markets the full £75 billion of QE will be in gilt purchases. There is still something uncomfortable about a government issuing lots of debt openly encouraging the Bank to buy it up, as George Osborne was doing last week. QE, crucially, does not boost bank lending.

The deed is done on QE, which brings me to credit easing,. In his letter to the governor giving permission for QE (which he has to authorise), the chancellor repeated his hit line from the Tory conference, that he had asked the Treasury to explore options for improving credit to small and medium-sized enterprises (SMEs).

Quantitative easing is intended to boost the quantity of money in the economy. Credit easing is intended to boost the flow of credit. They should be interchangeable but are not. I am much keener on the latter, having first written about it back in April 2008 and returned to it frequently.

Then the issue was the drying up of mortgage lending. From the start of 2009 it became the slump in lending to SMEs, which is what I have been writing about more recently. How do you address it? Put simply the Bank, on behalf of the Treasury, agrees to buy bundles of SME loans.

If the problem is funding such loans in markets, having an official buyer would overcome it. If the problem is confidence, an official buyer would ease investor worries about buying such securities.

So the chancellor’s commitment to explore credit easing was welcome but has to overcome a lukewarm Treasury and a hostile Bank. It is also very late. SME lending has been falling nearly three years.

Even if a plan is put in place it will be next year before anything happens. I would have loved to have seen the Treasury and Bank working together to get lending to where it is needed. I would love to have seen the Bank announce that it is ready and willing to buy up bundles of SME loans. Sadly it is not happening. Any credit easing will merely “complement” QE. A pity.

Is the recovery happening? As I promised last week, the Office for National Statistics has rewritten history. It has done so, however, in a way few expected.

All the headlines were grabbed by downward revisions to growth this year to 0.1% in the second quarter (form 0.2%) and 0.4% (from 0.5%) in the first. Take in the 0.5% snow-related fall in the final quarter of last year and there has apparently been zero growth in the past nine months.

I would not be too concerned about those figures, which are too recent to have undergone significant revisions. The really surprising thing was, according to the ONS, the economy shrank by 7.1% in the recession, rather than the 6.4% thought. That is hard to square with the employment figures and the message from the surveys but so be it, for now at least.

The other news was that growth in the 2000s - before the crisis - was revised up. As Michael Saunders of Citi points out, cumulative growth from 2001 to 2007 is now put at 21.1%, compared with 17.9% before. That is why, despite a deeper recession and a slower recovery, gross domestic product now is higher than we thought.

The revisions confirmed why GDP data are hopeless for short-term policy decisions. Now we know that in summer 2008, when the Bank was dithering about cutting rates, the economy was dropping like a stone, by 1% in the second quarter. At the time it was reported as a 0.2% rise.

The recovery is now estimated to have begun in the third quarter of 2009, as many of us said at the time. Then, it was apparently refusing to recover at all. Maybe this is for the nerds. But it is important. We do not get the numbers we need.

What those numbers tell us now, however, is also important. Consumer spending, down 0.8% in the latest quarter, is in recession; no higher now than in 2005.

It is my strong view that while some of that reflects the squeeze on real incomes from the government’s fiscal tightening, notably the Vat hike, the overwhelming majority is from the unintended income squeeze from high inflation. The recovery needs rising consumer spending. It will not rise as long as incomes are so squeezed.

In announcing more QE the Bank said it was more likely inflation would undershoot its 2% target in the medium-term. That is not good enough. It needs to be certain of an undershoot. A sustained period of high inflation needs to be followed by a long period of below-target inflation to restore real incomes. Easing that squeeze is the easing the economy really needs.

The Bank's rationale for doing an additional £75 billion of quantititative easing is set out below. When asked in August about what would prompt the Bank to do more, both Sir Mervyn King and Charlie Bean said it would be the expectation of an undershoot of the 2% inflation target. Sure enough, that is included in paragraph four below. But the Bank's forecasting record on inflation, frankly, inspires little confidence on this score.

"The pace of global expansion has slackened, especially in the United Kingdom’s main export markets. Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery.

"In the United Kingdom, the path of output has been affected by a number of temporary factors, but the available indicators suggest that the underlying rate of growth has also moderated. The squeeze on households’ real incomes and the fiscal consolidation are likely to continue to weigh on domestic spending, while the strains in bank funding markets may also inhibit the availability of credit to consumers and businesses. While the stimulatory monetary stance and the present level of sterling should help to support demand, the weaker outlook for, and the increased downside risks to, output growth mean that the margin of slack in the economy is likely to be greater and more persistent than previously expected.

"CPI inflation rose to 4.5% in August. The present elevated rate of inflation primarily reflects the increase in the standard rate of VAT in January and the impact of higher energy and import prices. Inflation is likely to rise to above 5% in the next month or so, boosted by already announced increases in utility prices. But measures of domestically generated inflation remain contained and inflation is likely to fall back sharply next year as the influence of the factors temporarily raising inflation diminishes and downward pressure from unemployment and spare capacity persists.

"The deterioration in the outlook has made it more likely that inflation will undershoot the 2% target in the medium term. In the light of that shift in the balance of risks, and in order to keep inflation on track to meet the target over the medium term, the Committee judged that it was necessary to inject further monetary stimulus into the economy. The Committee therefore voted to increase the size of its asset purchase programme, financed by the issuance of central bank reserves, by £75 billion to a total of £275 billion. The Committee also voted to maintain Bank Rate at 0.5%. The Committee expects the announced programme of asset purchases to take four months to complete. The scale of the programme will be kept under review."

The quarterly national accounts, produced yesterday by the Office for National Statistics, are a challenge for the government and - on the face of it - an incitement to action by the Bank of England. Growth of just 0.4% in the first quarter and 0.1% in the second (down from 0.5% and 0.1% respectively) leave growth over the latest nine months flat.

The new GDP figures, here, are indeed interesting. Against expectations that the ONS would revise down the peak-to-trough fall in GDP, it has increased it, to 7.1% from 6.4%.

The recession started before Lehman Brothers and did so aggressively, with GDP now estimated to have fallen sharply in the second quarter of 2008, and for 2008 as a whole. This is a very different picture to the one policymakers had at the time. One crumb of comfort is that the economy pulled out of recession in the third quarter of 2009, as many of us said it did at the time.

What about the latest data? We still have a picture in whiich most of the economy grew pretty well in the first quarter, with services up by 0.7% and manufacturing 1.1%, before slowing in the second to 0.2% in each case. In both quarters energy dragged down the overall GDP rise, while in the first weak construction and in the second the additional bank holiday were depressing factors.

What should be the Bank's response? There are plenty of reasons why the Bank might want to do more (there's speculation about a rate cut even though this appeared to be rejected last month) and quantitative easing will be on the agenda. But, while there may be reasons to do this, the GDP figures should not be among them. The Bank did not believe the recent data before and will believe them less now.

George Osborne's Tory party conference speech, here, was notable for the absence of any significant spending commitments, a robust defence of the coalition's fiscal strategy and some imaginative thinking on getting credit flowing to small and medium-sized firms.

Though the details are sketchy, it is good that the Treasury is finally starting to think about credit easing, and has the ability to drag a reluctant Bank of England with it.

My favoured approach would be to swap out some of the gilts the Bank has bought under quantitative easing - at a profit - for bundles of SME loans. The Bank would have to be indemnified against losses on these securities, though that is the case at present under QE. Adam Posen of the monetary policy committee would do it in conjunction with more QE but that is not strictly necessary.

Some of the coverage of the credit easing announcement suggests the Treasury would buy the bonds of large corporates in the event of a eurozone meltdown. That may become necessary but does not fill the SME gap.

Earlier there was a boost for the UK with a rise in the purchasing managers' index for manufacturing from 49.4 to 51.1 - into expansion territory - while most eurozone PMIs suggest contraction.

Two releases from the Bank of England, one on credit conditions, the other the latest deliberations of its financial policy committee.

Credit conditions first. It said the following:

"The availability of secured credit to households was reported to have increased slightly in the three months to early September 2011. Lenders expected availability to increase a little further in the next three months. Lenders reported that the availability of unsecured credit to households had also increased in 2011 Q3. Availability was expected to be broadly unchanged in Q4.

"The availability of credit to corporates was reported to have been broadly unchanged for large and medium-sized companies and slightly higher for small businesses in 2011 Q3. Availability was expected to remain broadly unchanged in Q4 for corporate of all sizes." That sounds mildly encouraging, except the Bank also said:

"Lenders reported a fall in demand for credit from small businesses and large companies, although demand from medium-sized companies was reported to have picked up a little." The survey is here.

Also from the Bank, the conclusions of the September 20 meeting of its financial policy committee, the key paragraph of which was this:

"The Committee therefore recommended that banks should take any opportunity they had to strengthen their levels of capital and liquidity so as to increase their capacity to absorb flexibly any future shocks, without constraining lending to the wider economy. This could include raising long-term funding whenever possible and ensuring that discretionary distributions reflected any reduction in profits."

Banks should look to the economy rather than dividends or, perhaps, big bonuses. The release is here.

The market response to weekend reports of a comprehensive eurozone rescue plan is mixed, perhaps with good reason. It is not clear how much the plan - leveraging the European Financial Stability Facility up to around 2 trillion euros, recapitalising European banks and a 50% Greek default - represents a workable rescue plan or wishful thinking.

I suspect we will see something of this nature emerge over the coming weeks. Until the details emerge, however, markets are likely to remain sceptical. The danger is that when the details emerge, it will all have been priced in. But it has a fighting chance of pushing the problem well into the future, and rather more than anything so far.

The Bank of England's monetary policy committee is clearly moving towards more quantitative easing and sterling has weakened in response. The key paragraphs from its September minutes are here:

"There remained substantial risks to inflation in the medium term in both directions. While there had been little news on the upside risks to inflation, the downside risks had clearly increased further. In the light of that outlook, Committee members reviewed the range of possible policy actions available to them to loosen monetary conditions were that judged appropriate. One possible action was to restart the asset purchase programme. This programme had been primarily focused on purchases of UK government bonds financed by the issuance of central bank reserves. There was inevitable uncertainty about the precise impact of asset purchases on demand and inflation, but asset purchases were an instrument that would continue to be effective in further loosening monetary conditions in the current context. The Committee also discussed a range of other possible policy options including: changing the maturity of the portfolio of assets held in the Asset Purchase Facility; revisiting the earlier decision not to lower Bank Rate below 0.5%; and providing explicit guidance about the likely future path of Bank Rate beyond the information about the Committee’s judgement of the medium-term outlook for inflation contained in the Inflation Report and the MPC minutes. At the current juncture, none of these options appeared to be preferable to a policy of further asset purchases should further policy loosening be required."

"Other members judged that it was appropriate to maintain the current stance of policy at this meeting. The current weakness of demand growth was likely to persist for longer than suggested by the central case in the August Inflation Report. This meant that the balance of risks to inflation in the medium term was likely to have shifted further to the downside. Most of these members thought that it was increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point."

The minutes are here.

There's also an interesting speech by Spencer Dale, the Bank's chief economist. He focuses on productivity and the output gap and suggests that, while some of the current productivity puzzle may be revised away, some of it reflects the medium-term effects of the crisis and the changed circumstances of the previously high-productivity energy and financial sectors. It suggests, perhaps in contrast to a gung-ho move to more quantitative easing, a more cautious approach. The speech is here.

Also today, official figures showed public sector net borrowing of £15.9 billion in August, a record for the month, compared with £14 billion a year earlier. Cumulatively there is still an undershoot, £51.5 billion versus £55.3 billion, but not much of one. More here.

On the face of it 4% growth this year and next, three years after the West's banking system almost failed, is what sports commentators would call "a result". That is what the International Monetary Fund is predicting, yet its World Economic Outlook is full of warnings.

4% growth is roughly in line with the global trend and a very long way from recession. “The global economy is in a dangerous new phase. Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing,” the IMF says.

Why the worry? All the usual reasons - the eurozone crisis, weak banks, a very slow US recovery by historical standards, and so on. But mainly because growth is so lopsided. Advanced economy growth is predicted to be 1.6% this year, 1.9% next, downgraded by 0.6 and 0.7 points respectively.

Emerging economy growth is also revised down, but only slightly. This year's 6.4% and next year's 6.1% are trimmed by 0.2 and 0.3 points respectively. China is put at 9.5% and 9.1%, India 7.8% and 7.5%. These are huge differences in performance between the advanced and emerging world. Are they sustainable?

Inevitably, all the attention will be on the UK forecast, 1.1% this year and 1.6% next, with a warning that the deficit reduction programme may have to be adjusted if growth is slower than this. Britain is in the pack of slow growing economiies. The World Economic Outlook is here.

Some may see George Osborne's emphasis on the euro's woes as a bit of an excuse, others as positive engagement by a Conservative chancellor in European matters.

In his speech today, Osborne was blunt about what's worrying the markets: "There is a lack of belief in the ability of political systems in the Eurozone and North America to respond."

And what needs to be done: "The Eurozone must now:

"Implement as quickly as possible their 21st July agreement; Resolve the uncertainty with respect to Greece; Specify how they intend to fulfil the commitment made at last week’s G7 meeting to “take all necessary actions to ensure the resilience of banking systems and financial markets”.

"Crucially, my European colleagues need to accept the remorseless logic of monetary union that leads from a single currency to greater fiscal integration."

I also liked this about what sounded like quite humble beginnings: "Over 40 years ago my father set up his own business, manufacturing and selling home furnishings. Over the years it’s grown to employ a couple of hundred people." The speech is here.

Retail sales volumes slipped by 0.2% in August and were flat on a year earlier. Slightly better than expected - the riot effect is hard to gauge according to the Office for National Statistics. It says:

"Concentrating on sales volumes between August 2010 and August 2011, the greatest upward pressure to the all retailing figure came from non-store retailing which increased by 13.7 per cent and provides 0.6 percentage points. Predominantly automotive fuel also increased by 1.6 per cent and provides 0.1 percentage points.

"Downward pressure came from predominantly non-food stores which decreased by 1.2 per cent and provides 0.4 percentage points, driven by decreases in the household goods stores which decreased by 4.1 per cent and other stores which decreased by 2.9 per cent. Predominantly food stores also decreased by 0.8 per cent and provides 0.3 percentage points."

Surprising to see petrol and diesel volumes up. More here.

Unemployment is clearly on the up again, with a rise of 80,000 in the May-July period, and an increase in the level to 2.51 million. This was the biggest three-monthly rise since August 2009. The claimant count also rose, though by slightly less than expected, up 20,300 in August to 1.58 million.

More details: "The unemployment rate for the three months to July 2011 was 7.9 per cent of the economically active population, up 0.3 on the quarter. The total number of unemployed people increased by 80,000 over the quarter to reach 2.51 million. This is the largest quarterly increase in unemployment since the three months to August 2009. The number of unemployed men increased by 39,000 on the quarter to reach 1.45 million and the number of unemployed women increased by 41,000 to reach 1.06 million, the highest figure since the three months to April 1988."

More details here: The big story is that, for the moment, the private sector is not generating enough jobs to compensate for the growth in the workforce and the loss of public sector jobs, which is gathering steam:

"Public sector employment decreased by 111,000 in the second quarter of 2011, to 6.037 million. Local government employment decreased by 57,000; central government decreased by 47,000 and employment in public corporations decreased by 7,000. Employment in the private sector increased by 41,000 to 23.132 million. The Q2 2011 public sector estimate is 240,000 lower than the same quarter a year ago."

Inflation rose on both measures last month, from 4.4% to 4.5% on the consumer prices index and 5% to 5.2% on the retail prices index. The figures were more or less in line with expectations. More here.

According to the Office for National Statistics: "The main upward pressures to annual inflation came from clothing, fuels & lubricants, furniture & household goods and domestic heating. The main downward pressure to annual inflation came from transport services, particularly passenger transport by air, sea and rail." Though inflation is not yet at a peak, it feels close to it, emboldening some members of the Bank of England's monetary policy committee.

Adam Posen, in a speech at Wotton-under-Edge, Gloucestershire (he gets all the glamorous gigs) made the case both for additional quantitative easing and for other intervention by the authorities.

He said: "Make no mistake, the right thing to do right now is for the Bank of England and the other G7 central banks to engage in further monetary stimulus. If anything, it is past time for us to do so. The economic outlook has turned out to be as grim as forecasts based on historical evidence predicted it would be, given the nature of the recession, the fiscal consolidations underway, and the simultaneity of similar problems across the Western world. Sustained high inflation is not a threat in such an environment, and in fact the inflation that we have suffered due to temporary factors in the UK is about to peak."

And also argued this, in line with some of my recent suggestions: "I would suggest that the Government set up two new public institutions to address the investment gap by increasing the availability of credit to SMEs and to new firms.25 One would be a public bank or authority for lending to small business, as already exists in many other countries (and thus can readily be designed in compliance with EU state aid rules). The Small Business Administration in the US and the Kreditanstalt fuer Wiederaufbau in Germany are two examples of the various forms this could take. The many recently unemployed lending officers from British banks, particularly from branches outside of the City of London, provide a ready skilled labour pool with which to staff such an institution ...

"The other institution I would encourage the Government to set up would be an entity to bundle and securitize loans made to SMEs. Essentially, we need a good version of Fannie Mae and Freddie Mac to create a more liquid and deep market for illiquid securities which can then be sold off of bank(s) balance sheets."

Agree with it or not, it is a very good speech. Available here.

There is a lot in the Independent Commission on Banking's final report, including a recommendation that UK retail banks hold equity capital equivalent to 10% of risk-weighted assets, and that large banking groups have primary loss-absorbing capacity, which is explained in detail in the report, of 17% to 20%.

Ring-fencing is, however, at the heart of the report, as expected: "The Commission’s view is that the board of the UK retail subsidiary should normally have a majority of independent directors, one of whom is the chair. For the sake of transparency, the subsidiary should make disclosures and reports as if it were an independently listed company. Though corporate culture cannot directly be regulated, the structural and governance arrangements proposed here should consolidate the foundations for long-term customer-oriented UK retail banking.

"Together these measures would create a strong fence. There would however be important differences relative to complete separation. First, subject to the standalone capital and liquidity requirements, benefits from the diversification of earnings would be retained for shareholders and (group level) creditors. Among other things, capital could be injected into the UK retail subsidiary by the rest of the group if it needed support. Second, agency arrangements within the group would allow ‘one-stop’ relationships for customers wanting both retail and investment banking services. Third, expertise and information could be shared across subsidiaries, which would retain any economies of scope in this area. Fourth, some operational infrastructure and branding could continue to be shared.

"For these reasons, ring-fencing should have significantly lower economic costs than full separation."

The ICB report, which is here, says implementation of the reforms should be completed at the latest by 2015.

The Bank of England used to get pressed by business to cut rates, now it is being urged (Institute of Directors et al) to boost quantitative easing. It did not do so today, leaving Bank Rate at 0.5% and QE at £200 billion but the minutes will be very interesting indeed.

The OECD is very downbeat in its latest interim assessment, warning that growth has stalled and that advanced economies will not grow much in the second half of the year.

"Economic recovery appears to have come close to a halt in the major industrialised economies, with falling household and business confidence affecting both world trade and employment, according to new analysis from the OECD," it says. "Growth remains strong in most emerging economies, albeit at a more moderate pace."

For Britain, the OECD sees growth, conventionally measured, of just 0.1% in both Q3 and Q4, while Germany and the big three eurozone economies (Germany, France and Italy) will see GDP contracting in Q4.

These, it should be remembered, are momentum forecasts, with a wide margin of error. The OECD also sees one or two signs of optimism:

"On the upside, a number of OECD countries are taking serious fiscal and structural reform measures, which should boost confidence. President Obama's announcement later today is expected to provide a boost to job recovery in the United States.

"Japanese growth is expected to be buoyed by the ongoing reconstruction efforts following the earthquake and tsunami. Inflation may have peaked in emerging markets, which will allow for some policy easing. Investment levels in many OECD countries remain well below historical averages, offering the possibility for renewed corporate spending in the coming months if uncertainty abates."

Its detailed forecast update is here.

Manufacturing output edged up by 0.1% in July and rose by 0.5% over the latest three months. Overall industrial production was hit by energy shutdowns and dropped by 0.2% and 0.4% respectively. Not great data but not bad either. More in the Office for National Statistics' not very useful press release here.

Earlier, the Halifax said house prices fell by 1.2% in August, were down by 2.6% on a year earlier but, curiously, rose by 1% over the latest three months.

A group of prominent economists has written to the Financial Times urging an early reduction in the 50% top rate of tax. It is a welcome contribution to the debate. I wrote on June 26 (Cut tax to make Britain a magnet for the world) about the damage the 50% top rate of tax was doing,and the need to send a signal by reducing it at the earliest opportunity.

I wrote: "What about an aggressive tax strategy to try to attract activity to Britain? By that I mean cutting the 50% top rate of tax and delivering early on the chancellor’s promise to give Britain the most competitive tax regime in the world.

"If such tax cuts could be shown to be at worst revenue-neutral, at best net revenue raisers - admittedly not an easy thing to demonstrate - there would be a powerful case for introducing them even at a time when the public finances are undergoing serious repair."

The piece, here, concluded: "High tax stunts growth, for business and individuals. Britain has become a high tax country. As long as that remains the case, growth will continue to be stunted. The golden goose will be well and truly stuffed."

Here is the FT letter. (May not be accessible to all).

There were no numbers in George Osborne's speech tonight but an acknowledgement that in "very unsettling times for the global economy", "this is not a normal economic recovery" and "we have all had to revise down our short term expectations over recent weeks".

He insisted that banking reform would not be done in a way that damages the City of London. I found this rather interesting on monetary policy. The Bank of England may be independent but it appears, to con a phrase, we're all in this together:

"That’s why in the months and years ahead we will do everything we can to keep monetary conditions throughout the economy as growth-friendly as possible – consistent with the inflation target.

"As Andy Haldane of the Bank of England reminded us last month, the new Financial Policy Committee we have established has a vitally important mandate to ensure that financial regulation takes account of the economic cycle and does not exacerbate downturns or booms.

"The Merlin agreement is already delivering more lending to SMEs. And if there is more we can sensibly do to ensure that the benefits of low interest rates are felt throughout the economy then we will do it. Of course, with a banking system whose balance sheet is some 500% of our GDP we have to make sure that our banks are successful but safe.

"That is why we face what I have called the “British dilemma” – how to sustain a world beating international financial sector without putting our economy or our taxpayers at unacceptable risk." The speech is here.

Once the role of Markit, which produces the monthly purchasing managers' surveys, appeared to be to expose some odd looking official figures. Markit's surveys signalled a UK upturn long before the Office for National Statistics did.

Now the purchasing managers' surveys are pointing to weak growth - it suggests its manaufacturing, construction and service surveys point to stagnation in the third quarter - at a time when the trajectory of the official figures (together with level effects) suggests faster growth in Q3 than Q2.

We will see what happens - the third quarter has time to run. In the meantime, some detail from today's service sector purchasing managers' survey, which showed a sharp index fall from 55.4 to 51.1, the sharpest drop for 10 years.

Was it the riots, the markets or just underlying weakness? This is Markit's verdict:

"August’s Markit/CIPS survey of UK service providers indicated a steep slowdown of activity growth, as an increasingly fragile economic environment undermined confidence and gains in new business. Activity rose to the least extent of 2011 so far, and confidence in the future was the weakest in a year. Increased caution amongst service providers and evidence of spare capacity led to another slight fall in employment.

"The headline index from the survey, the seasonally adjusted Business Activity Index, plunged 4.3 points in August to register 51.1, only modestly above the 50.0 no-change mark. The decline in the index was greater than those seen in the autumn of 2008 (following the collapse of Lehman Brothers) and was surpassed only by the foot-and-mouth related fall of April 2001.

"Moreover, the rate of growth implied by the index was the slowest since December 2010’s weather-related contraction, with respondents primarily blaming a weaker underlying trend in new business and general economic uncertainty. There were a few reports that the rioting and public disorder seen in some areas of the country in early August had adversely affected activity."

Construction may only be 6% of the economy but monitoring is proving a headache. The purchasing managers' index (PMI) for construction showed, on the face of it, an encouraging picture, with growth continuing in August. Readings above 50 on this survey are consistent with growth, so the drop from 53.5 in July to 52.6 in August was consistent with slower growth, not a fall in output.

However official figures for new construction orders in the second quarter showed something close to Armageddon. New orders fell by 16.3% in the quarter and, according to the statistical release: "The total volume of all new orders is now at its lowest total since the third quarter of 1980." Most will find that hard to believe and the Office for National Statistics appears to be suffering ongoing problems with the data. Anyway, the figures are here.

Perhaps more importantly, US non-farm payrolls showed no growth at all in August, and unemployment stayed at 9.1%.

After an upbeat CBI manufacturing survey last week, there were high hopes for the purchasing managers index this week, but it disappointed, slipping from 49.4 in July to 49 in August, consistent with a decline in output in the sector.

There was not a lot of good news in the detail. This from Markit: "Business conditions in the UK manufacturing sector deteriorated further in August. Production fell for the first time since May 2009, as new order inflows declined at the most marked pace in almost two-and-a-half years. The trend in new export business was also substantially weaker than one month ago.

"At 49.0 in August, from a revised reading of 49.4 in July, the seasonally adjusted Markit/CIPS UK Manufacturing Purchasing Managers’ Index posted its lowest reading for 26 months."

The Nationwide said that house prices fell by 0.6% in August and fell by 0.4% on a year earlier. In nominal terms they are just under 10% below their 2007 peak. More here.

Was the manufacturing upturn a flash in the pan, or did it just hit a temporary soft patch? The latest CBI industrial trends survey offers some encouragement for the latter view. These are the highlights:

"Of the 510 manufacturers responding to the CBI’s August monthly Industrial Trends Survey, 29% of firms described total orders as above normal, and 29% said they were below. The resulting rounded balance of +1% shows order books remain well above the long-term average of -18%, and is an improvement on the previous month’s balance of -10%.

"While 24% of firms said export order books were above normal, an equal 24% said they were below. The resulting balance of 0% compares with -8% in July, and is also significantly above the long-term average (-21%).

"Expectations for growth in factory output over the coming quarter have picked up a little. 31% of firms predict that production will rise in the next three months, and 17% anticipate that it will fall. While the resulting rounded balance of +13% remains above the long-term average (+6%), it represents a continuation of the broader trend of moderating expectations since April."

Though the July public borrowing figures were better than expected - net borrowing of £20m in comparison with £3.5 billion a year ago - the deficit is not improving as fast as hoped and there is work to be done in the remainder of the year. The Office fot Budget Responsibility, here, cites weaker than expected corporation tax receipts and income tax revenues, though hopes for stronger data later in the year.

So far, borrowing in the first four months of the the fiscal year is about £2.9 billion lower than a year earlier. The OBR's forecast is for a £20 billion full-year fall in borrowing, from £142.9 billion to £122 billion, so is looking for an improvement. Weaker growth projections aren't helping.

The 0.2% rise in retail sales in July was better than the surveys had suggested but was driven entirely by food sales. Non-food stores saw their sales drop by 1.1%, the first fall since January 2010. Retail sales volumes were flat year on year though values were up by 4.3%, an indication that if inflation were lower, retailers would be doing rather better in volume terms. The figures are here.

On the New Statesman blog Danny Blanchflower, former member of the Bank of England's monetary policy committee (MPC), has launched a spirited attack on George Osborne. The chancellor, he says, "needs to get his facts straight". Why? Because instead of the rise in employment the government claims, it is in fact falling.

How so? Because in the latest quarter, April-June, total weekly hours worked fell, and were down by 6.9m on a year earlier. That, according to Blanchflower, in the equivalent of nearly 200,000 lost jobs.

But hang on a second, didn't we have an extra bank holiday in the second quarter? And wouldn't that naturally lead to a fall in hours worked? Of course it would. In fact, there's an 11m drop in weekly hours worked between the first and second quarters. The sequence of weekly hours worked numbers, Q2 2010 917.6m, Q3 921.1m, Q4 920.7m, Q1 2011 921.9m, Q2 910.6m, points strongly to a bank holiday effect, as the Office for National Statistics says in its explanatory notes.

The News Statesman blog is here and the official figures are here but I think Danny needs to get his facts straight.

The Bank of England's August inflation report was dovish, and so were the minutes of its August meeting. Not so long ago the Bank was split 6-3 on the question of hiking rates, now it is back to 9-0, the two remaining monetary policy committee members who had voted for higher rates - Martin Weale and Spencer Dale - reverting to a no change position.

MPC members are worried about the global slowdown and very concerned about events in the eurozone. However, they ruled out taking action in anticipation of a eurozone disaster. The Bank is hugely uncertain about the outlook for growth and prospects for inflation.

This paragraph sums up that uncertainty: "Some members considered whether there was a case for increasing the degree of monetary stimulus by undertaking a further programme of asset purchases. Those members concluded that the case was not yet strong enough, particularly in light of the lower path for Bank Rate now implied by financial markets. Further asset purchases might nonetheless become warranted were some of the downside risks to materialise. Some other members remained particularly concerned about risks to the upside associated with a sustained period of above-target inflation. For them, plausible outcomes for productivity growth, company margins, the degree of spare capacity in firms, or import price pass-through could also result in inflation remaining elevated. But recent developments had weakened the case for removing some of the monetary stimulus." The minutes are here.

Meanwhile, the latest labour market statistics were downbeat, with the claimant count up by 37,100 in July to 1.56m, its biggest monthly increase since May 2009. The Labour Force Survey measure of unemployment rose by 38,000 to 2.49m, 7.9% of the workforce. An employment rise of 25,000 was insufficient to compensate for growth in the workforce.

In truth, the LFS measure of unemployment has been close to 2.5m for the past couple of years. Even so, these were softer numbers. More here.

The trouble with high inflation is that it can become embedded, particularly when institutional factors kick in. So the July retail price inflation rate of 5% will mean higher rail fares (RPI plus 3%) in January, which in turn will push inflation higher next year.

High inflation also makes public spending harder to control. July saw a rise in consumer price inflation from 4.2% to 4.4%, June's fall proving only temporary. Core inflation measures rose by 0.2 or 0.3 percentage points. By September, inflation will be on a rising trend, and that is the month used for the following April's pension upratings.

There are reasons why inflation should fall next year, notably the January VAT rise dropping out of the annual calculation. The big risk is that firms have changed their pricing behaviour, perhaps even in response to what they think are permanently lower volumes.

If I were at the Bank of England, I'd be slightly worried about this, from the Office for National Statistics' analysis. It cites price rises for "miscellaneous goods & services where the upward pressure came from a wide variety of goods and services but by far the largest contribution came from financial services where, overall, fees rose this year but fell a year ago, particularly for arranging mortgages". More here.

The Bank of England is not given to making commitments to keeping interest rates steady for two years and will not do so now, according to Mervyn King, the Governor. But the markets appear to be doing that job anyway. According to King, the market view on rates implies something pretty close to unchanged rates for the next two years.

As expected, the Bank downgraded its growth forecasts and thinks there is an even chance of inflation being above or below the 2% target in two years' time. That is on the basis of the market profile for rates and the existing £200 billion of asset purchases, or quantitative easing. More QE could come into the frame if the monetary policy committee thinks inflation is heading decisively below target. Some would argue that the bar should be set rather higher than that but more QE will be the thing to watch out for over the coming months.

This is King on the headwinds to growth: "Over the past year, output, according to initial official estimates, has grown by less than 1%, reflecting a substantial squeeze on households’ real incomes. Underlying growth in the second quarter was probably stronger than the headline figure of 0.2% once we allow for the effect of special factors, such as the additional bank holiday, although the reverse is likely to be true of the third quarter. In the Committee’s view, the weakness in underlying activity is likely to be somewhat more persistent than previously expected.

"There are a number of headwinds to world and domestic growth over the forecast period, not least the private and public debt overhang. And these headwinds are becoming stronger by the day. Reflecting this, and the prolonged period of economic adjustment facing some countries, the MPC’s projections embody relatively slow growth in the euro area. The intensification of sovereign fiscal concerns has been associated with renewed funding stresses for banks which are contributing to high borrowing spreads, tight credit conditions for households and smaller companies, and exceptionally weak credit and money growth in the UK."

And on the risks facing the UK and other advanced economies: "It is almost exactly four years since the start of the financial crisis. The origins of the crisis lie in the large stocks of indebtedness that resulted from the widening imbalances in the world economy, about which nothing was done for so long. One way or another, the losses that were built up in recent years will have to be shared between creditors and debtors; in the world economy between creditors in the East and debtors in the West, and within the euro area between creditors in the North and debtors in the South.

"The key question is whether that burden sharing will take place in the context of a downturn in the world economy, or whether it will take place in the context of a rebalancing of overall demand. The big risks facing the UK economy come from the rest of the world. We must work with our colleagues abroad to tackle the challenge of how to reduce the overhang of private and public debt. But there is a limit to what UK monetary policy can do when large real adjustments are required. And it cannot influence inflation over the next few months. But it can ensure that policy is set in such a way that these adjustments take place against a backdrop of low and stable inflation. And that is exactly what the MPC will do."

So a difficult environment. The inflation report is here.

A week, which is when I last posted on this site, is a very long time. Anyway, those who were hoping for an announcement of a third wave of quantitative easing by the Federal Reserve on Tuesday evening were disappointed, though the Fed said it discussed a range of policy tools and is "prepared to employ these tools as appropriate".

Specifically, it made the announcement that it would keep the Fed Funds rate at its current level (0 - 0.25%) until at least mid-2013. Optimists will see this as a sign that the Fed is prepared to do everything to maintain the recovery, pessimists as evidence that America is turning into Japan.

The vote was not unanimous. Three members of the 10-member Federal Open Market Committee, Richard Fisher, president of the Dallas Fed, Charles Plosser of Philadelphia and Narayana Kocherlakota, Minneapolis Fed, dissented, preferring merely a commitment to keep rates low for an "extended period". This was the first time under Ben Bernanke's presidency there have been three dissenting votes.

Earlier in the day we had disappointing UK data, with a 0.4% drop in manufacturing output in June (though a flat figure for overall industrial production) and a widening in the trade deficit in June to £4.5 billion, from £4.1 billion in May, This despite a bigger fall in import volumes in June (5.8%) than the drop in export volumes (2.7%). Even so, the National Institute calculated that GDP rose by a healthy 0.6% in the three months to July.

An interesting blog from the IMF, here, setting out some different scenarios for the UK economy. It says that if demand weakens significantly, the authorities should be prepared to respond quickly with more quantitative easing and tax cuts.

Overall, though, it says there is no need to change now: "For now, staying the course and implementing the wide-ranging policy program that was agreed last year seems the right thing to do."

Manufacturing has had a bad July throughout Europe, according to the Markit purchasing managers' indexes. But Britain appears to have fared particularly badly. The PMI dropped from 51.4 in June to 49.1 in July. With no obvious special factors, this was bad news. Output is just about expanding but everything else is weak.

This is Markit's assessment:

“The Manufacturing PMI retreated into contraction territory in July. Growth of output reached a near standstill following the steepest decline in new orders for over two years, while payroll numbers were lowered for the first time since March 2010. This is a marked turnaround from the strong start made to the year.

“It is not entirely unexpected given that three of the pillars supporting the surge during Q1 – inventory rebuilding, a purple patch in global growth and stable domestic demand – have somewhat crumbled. Even though the weak sterling exchange rate is still supporting overseas sales, softer economic growth in key trading partners means it is having a much lesser impact at a time when domestic demand is contracting. With austerity arriving at home and debt ills rising in the US and euro area, significant headwinds are on the horizon.

“More positive news was seen on the price front. Inflation of input costs and output prices both moderated, while supply-chain pressures subsided, providing additional support to the Bank of England’s belief that inflationary pressures will prove transitory.”

The Nationwide says house prices edged up by 0.2% in July but were down by 0.4% ona year earlier. It describes the market as stable, though at a lower level of activity. Year-on-year price changes have been essentially flat since November 2010.

The number of transactions in the second quarter, 204,000, was the lowest for two years. The market is not really recovering. The Nationwide also notes that home ownership continues to decline, from a high of 70.9% to 67.9% on the latest figures for England and Wales. More here.

The stability of house prices looks odd against plunging consumer confidence. GfK-NOP says its confidence reading, down five points at minus 30, has only been lower twice in the survey's 37-year history, in the early 1990s and mid-2008. It fits with weak housing demand.

Expectations management is always useful, and so it is that growth of 0.2% in the second quarter of 2011 is moderately good news. Given the range of special factors depressing GDP, a negative number was perfectly possible.

There is nothing much to write about in these figures. Growth of 0.7% over the past 12 months is feeble and would only have been a little over 1% adding back the special factors in.

Even so, the service sector seems to be growing by around 0.9% a quarter (0.5% in the second with a possible 0.4% subtracted by the extra bank holiday and other special factors), after an actual 0.9% in the first. Q2 service sector growth was without any contribution from government.

The ONS is sticking with its strange construction numbers for Q1 but the sector contributed to growth in Q2. Manufacturing was hit by Japanese disruption, but still has momentum. So underlying growth of 0.6% or 0.7% in Q2. Not spectacular but certainly not bad. More here.

European leaders went further than expected in their response to the eurozone crisis. Whether the Brussels summit meets Christine Lagarde's descritpion of a "game changer" remains to be seen but it has done what was vital, which was to buy time, and to rescue a second Greek rescue, with 109 billion euros from official sources and up to 50 billion from the private sector, including a haircut for the banks of up to 21%.

Questions that still need to be answered include:

Will the EFSF (European Financial Stabilisation Facility) need to be increased to take on its new role of stepping in early?

Will the fact of the EFSF stepping in itself generate alarm?

Will the change in terms on Greek, Irish and Portuguese debt be regarded as a default by the ratings agencies?

Does it take the prospect of Spanish and Italian contagion off the table, as the initial market reaction appears to suggest?

More details of the package will be provided by Manuel Barroso, the president of the European Commission, at noon.

Thee are still huge questions about the sustainability of the debt position of Greece and others. These countries are still very uncompetitive within the euro. But this has bought time.

(0)

Retail sales volumes rose by 0.7% in June, better than expected, thanks to some hefty discounting by retailers. Retail sales values were up by only 0.3%. There was some fascinating detail in the numbers. Overall retail sales volumes in June were just 0.4% up on a year earlier, while sales values rose 4%, reflecting higher prices (including VAT).

Within the volume numbers, however, there was a big 4.2% drop in food sales, a record. A lot of this is explained by higher prices, up 5/8%. In contract, non-store retailing (internet and mail order) was up by 24.4%. The share of internet sales in total sales rose from 8.5% to 9.9% between May and June. More here.

The public finances, meanwhile, continued to disappoint. The expected drop in the deficit is not happening. Net borrowing in June was £14 billion, up from £13.6 billion in June 2010. Cumulative borrowing in the first three months of 2011-12 was £39.2 billion, only fractionally down on the corresponding period of 2010-11.

The problem is on the spending side. Current receipts for the first three months of 2011-12 were £121.1 billion, up from £115.8 billion a year earlier. But currrent spending was also up, from £151.6 billion to £156.8 billion. Details here.

(2)

The Bank of England monetary policy committee's July minutes showed, as expected, a 7-2 vote in favour of keeping Bank rate at 0.5%, with only Spencer Dale and Martin Weale in favour of a quarter-point rate hike and Adam Posen continuing to push for an additional £50 billion of quantitative easing. But the minutes also showed the Bank's dilemma.

On inflation: "Inflation had been well above the 2% target as a result of the temporary boost from higher energy and other commodity prices, the increase in the standard rate of VAT and the past depreciation of sterling. Despite the fall in CPI inflation in June, it was likely that inflation would rise further, to over 5%, in the coming months. In the light of recent developments in utility and food prices, the peak in inflation was likely to be a little higher and come sooner than the Committee had previously expected."

And on economic activity: "The risks posed by an intensification of the sovereign debt and banking problems within the euro area to the prospects for economic activity and the financial system at home had remained substantial. The funding costs faced by the major UK banks remained elevated, in part reflecting those risks emanating from within the euro area, and were likely to continue to affect the price and availability of credit to many households and businesses adversely. Indicators had pointed towards continued modest underlying UK GDP growth in the second quarter and, more tentatively, to some softening in the outlook for the third quarter. But the implications of weaker activity for inflation would depend on the factors that had caused it."

This is a committee that feels itself to be buffeted by events outside its control. Overall, it says, the case for raising rates in the near-term have weakened. It is still relying on domestic factors, spare capacity in the economy, to bring down inflation. For that to happen, these unhelpful external factors will have to go away. The minutes are here.

This blog post from the International Monetary Fund is an accompaniment to yesterday's warning about lack of action on the debt crisis. It argues, as in the UK, that Europe needs a plan for growth through reform. It is available here.

The IMF has warned Europe it has to act fast to stem the sovereign debt crisis. It says: "Market participants remain unconvinced that a sustainable solution is at hand.

"The euro area’s banking system continues to display weaknesses. Leverage and dependence on wholesale funding remain high. Banks in the periphery are vulnerable from large exposures to their governments and real estate and from high marginal wholesale funding costs.

"Across the region, banks are significantly exposed to sovereign risks, with a weak tail of banks with low profitability and very thin capital levels remaining particularly vulnerable to further shocks." Its series of reports on the euro area are available here.

Are the rating agencies acting responsibly of just doing the equivalent of shouting fire in a crowded theatre? This short paper from Costas Milas (Keele Management School) and Theodore Panagiotidis (University of Macedonia and the LSE) challenges the logic of recent eurozone downgrades. It can be accessed here.

The EU criticism of the ratings agencies has been that they have provided a US perspective on the eurozone's troubles. Hence talk of setting up European ratings agencies. There may be a point to that but it would take years for any such agencies to build credibility.

In the meantime, the EU argument is undermined by the fact that the agencies are also making life difficult for America too. S & P has now placed the US on "creditwatch negative", both because of the short-term debt impasse and longer-term worries.

It says (last night): "Today's CreditWatch placement signals our view that, owing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days. We have also placed our short-term rating on the U.S. on CreditWatch negative, reflecting our view that the current situation presents such significant uncertainty to the U.S. creditworthiness." The assessment is here.

Given the debate over whether the economy has shown any growth over the latest quarter, indeed over the latest nine months, the labour market is still doing pretty well. On the Labour Force Survey measure, employment rose by 50,000 over the March-May period (though 31,000 of this was in part-time jobs), while LFS unemployment fell by 26,000.

The employment rate ws 70.7%, the same as in the December-February period, while the unemployment rate slipped to 7.7% compared with that previous three-month period. The level of unemployment is currently 2.45m. It has been around the 2.5m mark for a long time. Employment has risen by 309,000 over the past year. Interestingly, given the growth debate, most of that increase - 187,000 - has occurred over the past two quarters.

The Office for National Statistics records that in the 12-month period to March, there was a rise of 77,000 in UK-born employment, and a rise of 334,000 in non-UK born employment. However, it adds: "The number of non-UK born people in employment is greater than the number of non-UK nationals in employment, as the non-UK born series includes many UK nationals. The estimates relate to the number of people in employment rather than the number of jobs. These statistics have sometimes been incorrectly interpreted as indicating the proportion of new jobs that are taken by foreign migrants."

The claimant count rose, however, by 24,500 to 1.52m, or 4.7% of the workforce. Some of this reflects claimants being moved off other benefits. It is also indicative, however, of some underlying softening of the labour market.

Also of note was a rise in average earninsg growth from 2% to 2.3%. This is not yet enough to worry the Bank of England but it is moving in that direction. All the figures are here.

Though there are some nasty utility price rises to come, the Bank of England will be encouraged by the drop in headline consumer price inflation from 4.5% to 4.2% and the drop in the core rate from 3.3% to 2.8%. It suggests weak demand is bearing down on inflation and that the spare capacity story is not entirely dead. Welcome news.

More here on the inflation figures. Three components of the CPI have very low inflation, including clothing and footwear, 1.5%, communication, 1.7%, and recreation and culture (minus 0.5%). Food, 6.9%, alcohol and tobacco, 9.6%, and transport, 7.9%, are at the opposite end of the spectrum.

Also out today, trade figures for May, which were disappointing. The overall trade deficit widened to £4.1 billion, from £3.1 billion in April. The figures are here.

This important report from the Office for Budget Responsibility will be published here on Wednesday July 13, not tomorrow as in some editions of today's Sunday Times.

The royal wedding was a splendid occasion but it risks setting the cat among the pigeons in terms of the gross domestic product numbers. The extra bank holiday in April coincided with a softening of economic activity and the result is that Q2 GDP could be very weak indeed, even negative.

The industrial production index averaged 89.8 in the first quarter. To even match that in the second quarter then, in the absence of revisions, industrial production would need to jump by 4% between May and June. Construction output is doing a little better. New figures show that output in the March-May period was 13.8% up on the previous three months. The figures, however, are unadjusted.

As for the service sector, all we know so far is that output fell by 1.2% between March and April. Its recovery in May and June is crucial to a positive Q2 number.

Manufacturing output rose by 1.8% in May, following a 1.6% drop in April. Manufacturing output was up by 2.8% compared with a year earlier. Though this was a good bounce in activity - spread across most manufacturing sectors - it left output down by 0.2% over the latest three months. A further recovery from tsunami and bank holiday effects will be needed for manufacturing to make a contribution to growth in the second quarter.

The bigger problem is with overall industrial production, dragged down by a weak energy sector. While industrial production rose by 0.9% between April and May, it was down by 0.8% on a year earlier and by 1.5% over the latest three months. More here.

The Halifax said house prices rose by a strong 1.2% in June, but were down by 0.5% in the latest three months and by 3.5% on a year earlier. The June reading means the house price trend is flattening out, according to the Halifax.

According to Martin Ellis, Halifax housing economist:

"House prices in the three months to June were 0.5% lower than in the previous quarter. This was the smallest quarterly fall in prices since the second quarter of 2010. There was a 1.2% rise in prices in June.

"Low interest rates, an increase in the number of people in employment and some tightening in market conditions earlier in the year are likely to have been the main factors behind the recent improvement in price trends. A slowly improving economy and sustained low interest rates should help to support broad stability in the market over the coming months." More here.

Also very perky, general price pressures, according to the British Retail Consortium. The Bank of England's inflation problem is not going away. According to the BRC's shop price index: "Overall shop price inflation increased to 2.9% in June from 2.3% in May. Food inflation accelerated to 5.7% in June from 4.9% in May. Non-food inflation rose to 1.3% in June from 0.8% in May."

After recent weak surveys, news that the service sector continued to grow at a decent pace in June will have comes as a relief, though Markit, which prepares the numbers, expects only 0.3% growth in gross domestic product in the second quarter.

More details from Markit:

- Activity continued to increase, but rate of expansion remained below trend.
- Incoming new business rose at solid, but slower, pace in June.
- Job creation remained minimal; business confidence down to eight-month low.

"UK service sector growth was sustained during June at a solid pace as volumes of incoming new business continued to rise. However, rates of expansion remained below trend, a factor that led to another month of broad employment stagnation. Moreover, confidence amongst service providers weakened markedly to the lowest since last October as panellists provided a generally downbeat assessment of current economic conditions."

"The headline index from the survey, the Markit/CIPS Business Activity Index, registered 53.9 in June, a broadly sideways movement on May’s 53.8. The index has registered above the crucial 50.0 no-change mark for six months in a row, and the latest reading was consistent with solid expansion of the UK service sector."

The Dilnot Commission has published its recommendations, which in summary are the following:

- Individuals’ lifetime contributions towards their social care costs – which are currently potentially unlimited – should be capped. After the cap is reached, individuals would be eligible for full state support. This cap should be between £25,000 and £50,000. We consider that £35,000 is the most appropriate and fair figure;
- The means-tested threshold, above which people are liable for their full care costs, should be increased from £23,250 to £100,000;
- National eligibility criteria and portable assessments should be introduced to ensure greater consistency; and
- All those who enter adulthood with a care and support need should be eligible for free state support immediately rather than being subjected to a means test.

The cost looks modest for achieving big changes, just £1.7 billion in 2010-11, though it rises, to £3.6 billion in 2025-6, in 2010-11 prices. The Treasury's concern will be over how rapidly these costs rise. The report is available here.

The manufacturing purchasing managers' index slipped to 51.3 in June, a 21-month low, from 52 in May. Though production edged up, other components were weak, notably domestic and export orders, and employment growth, which was at a nine-month low.

According to Markit:

"The manufacturing sector continued to slip closer to stagnation in June, with the PMI sliding to a 21-month low. It is worrying to see that the slowdown is not just being driven by the weakness of domestic market strength, with growth in new exports having also slowed sharply since the start of the year as the global economic recovery drifts into a softer patch.

"It is also disappointing to see that the easing in supply chain delays has yet to feed through to a much hoped for revival in manufacturing growth.

"With strong headwinds already in place and austerity measures likely to put increasingly counteractive pressure on domestic and consumer demand, it looks as if manufacturing has entered a slower growth phase which could be with us for some time. With manufacturing growth in the first quarter having been revised down from an earlier buoyant estimate of 1.1% to a far less impressive 0.7%, the survey data will call into question the sector’s ability to play a major role in delivering a robust and sustainable economic recovery."

There will be no revival in the availability of credit to households or businesses in the next three months, apart from unsecured credit, according to the Bank of England's latest credit conditions survey, here. It says:

"The availability of secured credit to households was reported to have been broadly unchanged in the three months to early June 2011. Lenders expected availability to remain flat in the next three months.

"Lenders reported that the availability of unsecured credit to households was little changed in 2011 Q2. Availability was expected to increase in Q3.

"The availability of credit to corporates of all sizes was reported to have been broadly unchanged in 2011 Q2. And availability was expected to remain broadly unchanged in Q3."

The Nationwide said house prices in June were flat compared with May and down a modest 1.1% on a year earlier. Not much change there either.

Only second rank data today but none of it very strong. Service sector output fell by 1.2% between March and April, largely reflecting the additional bank holiday. April's level of service sector activity is 0.5% down on the first quarter average, so will need a decent May-June bounce to show growth between the two quarters. Q2 service sector growth is unlikely to match the first quarter's 0.9% expansion. More here.

Also released, Bank of England data showing that M4 rose by £5.2 billion in May but was up by a modest 1.7% on a year earlier. More on that here. Mortgage approvals rose slightly to 45,940 in May, compared with 45,447 in April but were slightly below their six-month average. Still very weak.

Weak productivity growth has been a feature of the recovery and it continues. Whole economy productivity grew by just 0.1% in the first quarter and was a mere 0.3% up on a year earlier. Hence strong employment. More here.

A clutch of data from the Office for National Statistics, of which the least notable was the first quarter gross domestic number, which was unrevised at 0.5%, following a 0.5% drop in the final quarter of 2010. So the "flat" story is maintained, though this is a strange way of presenting the figures.

GDP was hit by 0.5% by poor weather in Q4 2010, made up part of this loss in Q1 2011, but some of the loss was permanent. Underlying growth in Q1 is suggested by the 0.9% growth in services and a 0.7% expansion in manufacturing but was knocked back by weak construction and weak energy output. The first looks implausible, the second temporary.

There were some back revisions in the GDP numbers. Growth in Q1 2010 was revised up by 0.2 percentage points, while growth in Q3 was revised down by 0.1.

The most eye-catching number, however, was for real household disposable incomes, down 0.8% in Q1, following a 0.9% drop in Q4 2010. Incomes were 2.7% lower than a year earlier. This looks implausibly large? Why, because other ONS figures show that employment rose by 1.4% over the year to Q1.

Unless all these jobs were very low paid, the rise in employment should have compensated, at least in part, for the drop in per capita incomes. Once again, the GDP numbers sit uneasily alongside the labour market statistics. More here.

Also released, first quarter balance of payments statistics, which show that the current account deficit narrowed to £9.4 billion, 2.5% of GDP, from £13 billion in Q4 2010. More here.

The Bank's financial stability report has always been a little harder to interpret than its sister publication, the inflation report. This one is slightly sifferent, in that it accompanies the recommendations of the interim financial policy committee (in the form of a series of detailed recommendations to the Financial Services Authority).

In time, when supervision has been fully transferred to the Bank, the financial stability report will be a summary/justification of the financial policy committee's own actions.

In the meantime, there's plenty in the report, with the main risk probably best summed up in Sir Mervyn King's opening statement: "The most serious and immediate risk to the UK financial system stems from the worsening sovereign debt crisis in several euro-area countries.

"As the Report makes clear, direct UK bank exposures to those economies are limited. But experience has shown that contagion can spread through financial markets especially when there is uncertainty about the precise location of exposures. A UK bank could have lent to a bank that itself had lent to a bank that in turn was exposed to sovereign risk.

"The Committee therefore judged that greater clarity about the extent of these exposures would help to limit the transmission of problems to UK banks, and that this extra transparency should be a permanent part of major banks’ reporting."

The Bank's systemic risk survey, conducted for the report, finds that the biggest risk to the UK financial system is an economic downturn, cited by 69% of respondents, followed by sovereign debt risks, 65%. However, the downturn factor is down from 83% in October, while the number citing sovereign debt fears is up from 39%. More here.

The Bank of England's monetary policy committee voted 7-2 for no change in Bank rate, as expected, with one of the seven, Adam Posen, voting for a further £50 billion of quantitative easing. The vote was as expected, with the more dovish Ben Broadbent replacing the hawkish Andrew Sentance. Even the two hikers, Spencer Dale and Martin Weale, acknowledged that growth was coming through rather weaker.

Two interesting aspects to the minutes. One was the risks to growth from the eurozone sovereign debt crisis: "While activity in the euro area as a whole had remained resilient, sovereign debt and banking problems could intensify, perhaps significantly, to the detriment of economic activity and the financial system."

Also of interest to me was that the MPC appears to accept that sterling's crisis-related fall is both necessary and here to stay. It said: "The sterling effective exchange rate index had been broadly stable since the beginning of 2009, suggesting that its earlier depreciation had been a step adjustment to the real consequences of the financial crisis and the necessity for economic rebalancing."

I disagree, and would argue that sterling's performance is closely linked to the stance of monetary policy. But it is good to have the view spelt out. More here.

Public sector new borrowing (excluding financial interventions) was £17.4 billion last month, compared with £18.5 billion in May 2010. It is an improvement but a painfully slow one. Indeed in the first two months of the current fiscal year (April-May), borrowing was £27.4 billion, up from £25.9 billion a year earlier.

The current budget deficit, £15.3 billion, also showed a small improvement on May 2010's £16.5 billion. But April-May (£24 billion) was also marginally worse than April-May 2010 (£22.3 billion). Public sector net debt rose to 60.6% of GDP, on the narrow definition.

Two months is too early to call a trend but there's work to be done to get down to the Office for Budget Responsibility forecast of a £122 billion net borrowing number for 2011-12, from an upward revised £143 billion for 2010-11. More here.

A section in George Osborne's Mansion House speech on Wednesday, which was widely picked up, also caught my eye. This was it:

"Here is a striking fact about the British economy over the last six quarters since the recession ended – a fact little understood but crucial to understanding our challenge. For five out of those six quarters, the financial sector has continued to contract.

"While our economy as a whole has grown by 2.5%, the financial sector has shrunk by 4%. Take the financial sector out of the equation, and economic growth in the rest of the economy during the recovery has actually been above its average rate of the last two decades. Put the financial sector into the equation, and economic growth has been below trend."

This struck me as surprising. Could one sector accounting for only 8% of gross domestic product - financial services - really drag down growth that much. So here's the Treasury's explanation:

Between 2009q3 and 2011q1: GVA (gross value-added) grew by 2.6% over the six quarter period, an annualised rate of 1.7%. The quarter on quarter growth rate was positive in every one of those quarters except 2010q4. GVAf (gross value added in financial services) grew by -4.0% over the six quarter period, an annualised rate of -2.7%. The quarter on quarter growth rate was negative in every one of those quarters except 2011q1. GVA-xf (excluding financial services) grew by 3.2% over the six quarter period, an annualised rate of 2.1%.

Between 1991q1 and 2011q1: The compound average rate of growth for GVA was 2.1%. The compound average rate of growth for GVA-xf was 2.0%.

So it works, although by only including the recent period of financial sector weakness in the 20-year comparison. For me there are two interesting things about this. The first is that the contribution of financial services to growth over that 20-year period was smaller than sometimes thought. It boosted growth but not by as much as is commonly supposed.

The second was the chancellor's reference to "trend". The Treasury has always maintained that trend growth is rather stronger than 2%, around 2.75%, and the Office for Budget Responsibility uses a higher figure, 2.35% until 2013, then 2.1%. 2% trend growth, if that is what the UK has, would have implications (adverse ones) for the public finances.

The volume of retail sales dropped by 1.4% in May, more than reversing the 1.1% rise in April. The Office for National Statistics says the weakness reflects concerns among consumers over the economic climate, including rising food and fuel prices. The trend, however, looks flat, with sales volumes up by 0.1% over the latest three months and by 0.2% on a year earlier. Retailers will be hoping the May rise in consumer confidence is reflected in higher sales over the summer.

Take out automotive fuel and the retail sales picture was even weaker: down 1.6% in volume in May and by 0.1% over the latest three months.

Sales values also fell by 1.4% in May but were up by 3.8% on a year earlier, reflecting higher prices. More here.

The employment numbers continue to surprise on the upside, with an 80,000 rise in the Labour Force Survey measure (to 29.2m) in the latest three months and an 88,000 drop in unemployment to 2.43m, 7.7% of the workforce. Employment is up by 376,000 over the past year, and is now only 333,000 below pre-recession levels.

Pay growth, however, remains weak, with total pay up by just 1.8% over the past 12 months and pay excluding bonuses up by 2%. You might say people are pricing themselves into jobs.

The claimant count rose by 19,600 to 1.49m last month. Normally a good indicator, it is unclear how much this is being distorted by deliberate action to move claimants off other benefits. More here on the numbers.

Also released, figures for public sector employment which showed a 24,000 first quarter fall, with a 27,000 drop in local government employment but, interestingly, a 7,000 rise in the number of civil servants.

The May inflation figures were OK, with consumer price inflation and retail price inflation stuck at 4.5% and 5.2% respectively. Still well above target, and above acceptable levels, of course, CPI inflation remaining at its highest since October 2008.

There is more inflation to come, barring a sudden drop in energy and commodity prices. The domestic fuel price rises announced by the utility firms have yet to feed through into the numbers. The May numbers benefited from a reduction in air fares (Easter timing effects) but were boosted by higher food prices.

This was a month when everything was unchanged, including RPX inflation, 5.3%, inflation excluding indirect taxes, 3%, and inflation at constant tax rates, 2.8%. More here.

The April industrial production figures were far worse than analysts expected. Not only was there a fall of 1.7% on the month but production was down by 1.2% on a year earlier. Manufacturing output fell by 1.5% and was up by only 1.3% on a year earlier.

Looking at some of the analysts' interpretations and those from industry, as well as the Office for National Statistics, it is sensible not to be too gloomy about these figures. The ONS release is here and here are a couple of pertinent points from it: "The additional April royal wedding bank holiday is likely to have had some impact on the April manufacturing data. Following standard ONS seasonal adjustment practice, which involves estimating and removing repeating calendar effects from the data, for example Easter, no adjustments have been made to the published data to remove the effect of this non-recurring bank holiday.

"We received feedback from a number of companies indicating shut downs were the reason for sales figures being lower than expected ... In June 2002, an extra bank holiday was created for the Queen’s golden jubilee. The late May bank holiday was also moved to the start of June. Between May 2002 and June 2002, manufacturing fell by 5.4 per cent, with changes in working patterns causing the fall.

"A number of car manufacturers have provided feedback indicating that the after effects of the tsunami in Japan reduced production levels in April 2011, due to a lack of parts. The transport equipment sub sector fell by 4.1 per cent compared to March 2011, the largest month on month decrease since July 2010. Within this sub sector, motor vehicle production fell by 7.6 per cent, also the largest month on month decrease since July 2010.

"In addition to this, we had feedback from some companies in the machinery and equipment sub sector and the other manufacturing sub sector that the tsunami had impacted on their production levels.

"April 2011 was the warmest April since records began. This affected both electricity and gas supply output due to reduced demand. Between March and April 2011, electricity supply output decreased by 4.3 per cent and gas supply output decreased by 11.2 per cent."

The National Institute of Economic and Social Research seems untroubled by the data, according to its monthly GDP estimate, which feeds in these figures. It reckons that GDP rose by 0.4% in the three months to May. Not strong, but not collapsing.

Bank rate on hold at 0.5%, quantitative easing maintained at £200 billion. The easiest prediction ever, as it will be for a while. The vote was probably 7-2 but we'll have to wait a couple of weeks to find out.

The economy's quiet and so is the trade picture. The overall trade deficit in goods and services remained at £2.8 billion in April, though the originally reported £3 billion deficit for March was revised down. The deficit in goods narrowed from £7.7 billion to £7.4 billion as a result of a £0.1 billion rise in exports and a £0.3 billion fall in imports.

Otherwise, the trends were muted. As th4e Office for National Statistics put it: "Excluding oil and erratic items, the seasonally adjusted volume of exports was 2.6% lower and the volume of imports was 1% lower in April, compared with March. Export prices of goods rose by 1.5% and import prices of goods rose by 1.1%, compared with March." Interesting to see export prices rising faster than those for imports, though that may be a compositional effect. More here.

What would you do if you wanted to boost economic growth in the short-term? You might slash interest rates, possibly cutting them to a record low level. A sterling devaluation would also help. But that's already happened. If you believe in the efficacy of fiscal policy as a short-term growth booster (something that was out of favour before the global financial crisis) you might cut taxes and increase public spending.

What you would not expect is to be able to achieve a growth boost through supply-side reforms, at least in the short-term. Such reforms, whether they are improving education and skills, cutting red tape, eliminating restrictive practices and increasing competition are not hard to think of. They are popular, particularly with businesses, as this note from the Institute of Economic Affairs' makes clear.

I don't disagree with any of it, but we should be honest about the time lags involved. The Thatcher union reforms of the 1980s did not really benefit Britain's labour market until the 1990s. These things take time. Plans for growth are welcome but long-term.

Meanwhile we have further evidence of a soggy consumer sector. Retail sales values in May were down 0.3% on a year earlier, according to the British Retail Consortium. Halifax house prices rose 0.1% in may but were down 4.2% on May 2010.

The International Monetary Fund's Article IV consultation backed the coalition government's fiscal plans, as expected. It says: "The weakness in economic growth and rise in inflation over the last several months was unexpected. This raises the question whether it is time to adjust macroeconomic policies. The answer is no as the deviations are largely temporary. Strong fiscal consolidation is underway and remains essential to achieve a more sustainable budgetary position, thus reducing fiscal risks. The inflation overshoot is driven largely by transitory factors."

Interestingly, snow does not play a part in the IMF's assessment of the recent slowdown: "Growth was flat over the last two quarters, as the inventory cycle—which helped power growth through much of 2010—came to a close and with consumer confidence impaired by spiking commodity prices, a soft housing market, and headwinds from necessary fiscal consolidation."

Growth will be around 1.5% this year, it says, then picking up to 2.5%. The report, while supportive, is littered with warnings. One of which relates to the output gap: "In the more difficult case in which weak growth and high inflation result from a much narrower-than-estimated output gap (which would be indicated by rapid wage growth), policies will have little choice but to tighten to re-anchor inflationary expectations. A narrower output gap would also imply a higher-than-currently-estimated structural deficit and therefore would require further fiscal tightening over the medium term."

The report is here.

In its most recent e-mail poll, the Shadow Monetary Policy Committee (SMPC) voted by six votes to three that Bank Rate should be raised in June. Five of the rate hawks wanted to raise Bank Rate by ½% to 1%, while one member (who had previously worked as a central banker in Hungary) wanted an increase of 1% to give a Bank Rate of 1½%.

The other three members of the shadow committee voted to hold Bank Rate at the ½% originally set in March 2009. There were several reasons why a majority of SMPC members wanted to see a rate hike in June. One was concern that the persistent overshooting of the inflation target – and the Bank of England’s less than convincing response – was undermining the credibility of the monetary framework. Another was the worry that the increasingly negative real interest rate paid on UK money holdings would induce further downward pressure on sterling, and that this would be fully reflected in domestic prices in the long run.

A third reason for a rate increase was the belief that the monetary authorities would have more flexibility in both directions if Bank Rate was raised to 1% or 1½% in June and, perhaps, 2% to 2½% in the longer term. This would allow the use of rate cuts as a stimulus in the future, if the economy turned out to be weaker than anticipated.

The main reason that three SMPC members wanted to hold Bank Rate at ½% was the concern that the UK recovery was not firmly established. There was also a belief that the banking system remained so weak that there would be a long period of sluggish money and credit growth ahead and that this would further limit the scope for recovery. This meant that the current negative real interest rates coexisted with abnormally tight money and credit conditions.

Comment by Roger Bootle
(Deloitte and Capital Economics)
Vote: Hold.
Bias: To increase Quantitative Easing (QE).

The economy remains very weak and there are serious doubts as to whether even a meagre pace of expansion can be sustained. The public sector job cuts are yet to bite and recent rises in inflation without compensation in pay increases are eating into disposable income. Meanwhile, there is no sign of either inflation expectations or wage increases taking off and the government bond market is quiescent. Inflation is likely to fall sharply next year.

In the circumstances, Bank Rate should remain on hold for the foreseeable future. Although it should not be deployed yet, the Bank should be prepared to do more Quantitative Easing (QE) if the economy weakens and inflation subsides rapidly.

Comment by Tim Congdon
(International Monetary Research)
Vote: Hold.
Bias: Neutral.

The early part of 2011 has seen broadly satisfactory macroeconomic conditions in the UK. Demand, output and employment have all been growing, and unemployment is edging down, even if the official estimates for Gross Domestic Product (GDP) in the final quarter of 2010 and first quarter of this year indicate stagnation in this six-month period. As so often in the past, the data almost certainly understate growth. When the Office for National Statistics (ONS) does eventually attempt its so-called ‘triangulation’ (i.e. to reconcile data on output, income and expenditure, which theory tells us should be identical), national output could well be revised up by ½% or so for this six-month period. Business surveys and employment numbers are the most reliable short-term guides to the economy and they argue that the economy is making steady progress.

However, inflation has been disappointing. Annual increases in retail prices of 5% plus take us back to the 1980s, as if the achievement of the so-called ‘Great Moderation’ period of low steady inflation was as nought. On the other hand, the majority view on the Monetary Policy Committee (MPC) is correct that special, non-recurring factors are responsible for the bulk of the above-target inflation number. In the year to April, the consumer price index was up by 4.5% but the ‘transport’ category was up by 9.6%, accounting for a 1.53% upwards movement in the Consumer Price Index (CPI). This means that over a third of the CPI increase was due to this one category, with the huge increase in the oil price being the main factor at work. The ONS now calculates a CPI-CT. This is a constant-tax-rate CPI, which is not quite the same thing as the more familiar CPIY, which excludes indirect taxes. As this CPI-CT index was up by 2.8% in the year to April, it is evident that – without the oil price change and increased VAT – the CPI number might well have been more or less on target. The warning here is that – if interest rates were now raised by, say, 1.5 percentage points, and oil and commodity prices were to fall sharply over the year to April 2012 (as might happen) – the annual increase in the CPI in that year might be beneath 1%. The target would be breached again, but now on the downside.

Non-oil, non-commodity-price cost pressures are weak. In the year to 2010 Q4 unit labour costs for the whole economy were up by a mere 0.7%. In a cost-accountancy sense, the underlying pressures on inflation are under good control and do not argue for strong counter-measures. Money growth is also subdued, in both the UK and elsewhere. The M4ex broad money measure rose by only 1.7% in the year to March 2011. Furthermore, there is little evidence that the last few months have seen an upturn in the growth of private sector credit. In fact, the recent withdrawal of state guarantees on some of their liabilities has obliged several UK banks and building societies to continue to shrink risk assets. Because Bank Rate is a mere ½%, and other short-term interest rates stand at historically very low levels, negligible money growth has been compatible with the steady macroeconomic improvement noted earlier. But it is laughable to claim – as, for example, Liam Halligan did in his Sunday Telegraph columns – that the upward blip in inflation in late 2010 and early 2011 is explicable in terms of ‘the printing of money’ due to QE.

My view remains that this is not the time to tighten monetary policy. The Great Recession was caused by officialdom’s determination to punish the banks, which had the predictable - but not widely noticed or predicted - consequence of checking growth in the quantity of money. The recovery from the Great Recession is being held back by officialdom’s continued determination to punish the banks, which will constrain the growth of bank balance sheets and the quantity of money for a few years yet.

Comment by Andrew Lilico
(Europe Economics)
Vote: Raise Bank Rate to 1%.
Bias: To raise Bank Rate further, and stand ready to do more QE.

To understand how to set monetary policy at the moment, it is important to distinguish between ‘quantitative’, ‘signalling’, and ‘referencing’ effects. ‘Quantitative’ effects mean those changes in monetary policy which have a more-or-less direct impact on the amount of money in circulation in the economy, or upon the speed at which it circulates. If, for example, interest rates are 10% and we cut them to 5%, then we should expect the quantity of money to increase (ceteris paribus). ‘Signalling’ effects describe the way in which changes in interest rates indicate to the market the MPC’s view about various aspects of the state of the economy, which then allow the market to update its own views. ‘Referencing’ effects denote the fact that Bank Rate is referred to in various contracts, with the prices or interest rates charged dependent on the level of Bank Rate (e.g. certain forms of tracker mortgage).

When interest rates fall below a certain level, the normal factors lying behind quantitative effects fall away. This happens for a variety of reasons, but the most important is that new constraints, that are normally loose, begin to bind. A well-known one is that, if interest rates were to become negative, so that people were charged for keeping money in the bank, some individuals might prefer to keep money in a safe at home – an option that always exists, but is not normally relevant. But, in fact, some such constraints begin to bind even before interest rates fall below zero.

The existence of such factors, and differences between countries and cultures and institutional arrangements, is an important reason why different central banks have varying ideas about what is the effective ‘minimum’ level of interest rates. For example, until the crisis of 2008 and 2009, Bank Rate had never been reduced below 2%, even in the depression of the 1930s. Nevertheless, Bank Rate was reduced to ½% (but not to zero) in 2009. However, the European Central Bank (ECB) regards its ‘minimum’ level as 1%, and has not cut below this figure. It is now fairly clear that Bank Rate is below the level at which it has material quantitative impacts. So raising Bank Rate from ½% to 1%, 1½%, or perhaps even 2% would not lead to quantitative tightening.

That does not necessarily mean that Bank Rate was cut too low in 2009. It was useful to provide signals to the financial markets about the willingness of policymakers to respond, for example via QE. However, one problem with Bank Rate being at ½% is that the ability to provide further signals by cutting rates is all-but absent. Monetary policy would provide more of a cushion if there were the capacity to cut rates if necessary. That could become highly relevant if, for example, there were to be further financial market problems triggered by a Greek default.

So, Bank Rate could be raised to 1%, 1½%, perhaps even 2% without that involving quantitative tightening. Doing so would also allow greater scope for signalling to deal with a crisis should one arise. That leaves only referencing effects. Bank Rate serves as a reference in certain tracker mortgages and other contracts. Raising Bank Rate would thus have an impact on mortgage-holders. There are two possible observations about this. First, macroeconomic policy has spent far too long trying to spare mortgage-holders from the consequences of their own folly. It is one thing if policy smoothes an eighteen-month transition, by retarding a fall in prices in order to allow mortgage-holders to better manage themselves out of short-term cash-flow problems. However, UK macroeconomic policy has been fixated on avoiding house price falls and mortgage defaults since 2004. Seven years, and no apparent end! Such interventions create losers as well as winners. People that did not over-extend themselves by borrowing absurd sums to pay inflated prices in 2004 and thereafter have been the unsung victims. It is morally wrong to indefinitely punish the prudent to aid the profligate. Even setting this point aside, however, the reality is that those most closely tied to Bank Rate are typically on extremely low interest rates – such as 2.5%, 0.99%, or even less. Those on mortgages of 4.5%, 5%, and so on, that would be most exposed to even modest rises in mortgage rates, are those least likely to be impacted by the referencing effects of a rise in Bank Rate.

We should be aiming to get Bank Rate up to a more natural ‘minimum’ level at which quantitative effects start to bind. It is not proposed that Bank Rate should be raised relative to inflation. The CPI figure is headed for 5%, at least, now. In November 2010, the possibility that CPI inflation could reach 5% was at the outer envelope of the Bank of England’s fan charts. Now it is the main case, whilst 7% is the outer envelope. On even the most hawkish of (credible) proposals, interest rates will not rise as rapidly as inflation. So, interest rates will be falling, not rising, in inflation-adjusted terms. Insofar as there is a signalling effect from rate increases, such signals will be useful. They would indicate (mirabile dictu!) that the Bank of England still had some vague fleeting interest in keeping down inflation, even if it long ago lost all interest in keeping to the official inflation target.

Some argue that the quantity of money is not rising rapidly enough. The backlog of extremely rapid monetary growth in 2005 to 2007, and the quadrupling of the monetary base since 2007, both suggest there is ample monetary room for prices to grow. Nevertheless, in the event that further pathologies arise in the financial sector – which is by no means implausible, they could indeed happen any time, and very probably will happen shortly after Greece’s impending default – the correct monetary policy responses will be: 1) relaxation (not tightening) of regulatory capital adequacy requirements; and 2) more QE. Interest rates are not the tool for all problems. We need to try to restore a little focus of interest rates on what they can affect: the quantity of money, inflation, and - if there were a credible monetary policy framework, which there is not - macroeconomic stability.

Comment by Patrick Minford
(Cardiff Business School, Cardiff University)
Vote: Raise Bank Rate to 1%.
Bias: To raise Bank Rate again, and for QE to be held with a bias towards reversal.

Inflation is now taking hold across the world economy. Western central banks still have their official interest rates at close to zero and are printing money as demanded at this cost. The demand for this money is growing very fast in the developing world, mainly in Asia; so money is being borrowed at this very low rate in the West and lent in the East in virtually unlimited quantities. Because the Asian economies do not want their exchange rates to go up against the US$ and other western currencies, their central banks buy the US$s, Euros, pounds etc and swap them for their own currency as fast as this money flows in. This means that the expansion of money and credit in the Eastern world is fast and furious. This is fuelling rapid credit-fed growth, in turn.

Much the same is true of other emerging market countries. All of them are enjoying a credit boom, fed by western money. This worldwide boom has renewed the upsurge in commodity prices evident in 2006 to 2008, before the Lehman crash. Since these economies are also short of labour, the boom has led to a general inflation, with prices and wages rising generally, and not just a pass-through of higher commodity prices.

How will this all end? This ‘carry trade’ (whereby dollars at low interest rates are ‘carried’ and lent in higher interest rate economies) is very low risk in the sense that the dollar is being systematically kept down by the emerging market countries’ central banks, with only a few central banks allowing a little bit of appreciation of their currencies. To stop this flow entirely would require these emerging currencies to float upwards until they were too expensive to lend to. However this will not be allowed to happen, so nervous are their governments of the chilling this might bring to growth, particularly of their exports.

At the same time the paradoxical thing is the weakness - or sluggish growth, at best - of the western economies whose interest rates are so low. Hence, commodity price increases have so far produced no sympathetic rise in wages in these countries, as labour is in excess supply and job growth is weak; high unemployment is forcing labour to take big real wage cuts. Profits growth is strong however since capital is in short supply, because it is needed for growth in the emerging world. So we observe growing western profits, and rising stock markets, falling real wages, and limited western inflation. One could describe this as rising world inflation accompanied by lagging wage settlements which are currently holding down western inflation. However once this terms-of-trade/real-wage correction has run its course, inflation in the West will equal world inflation. Already in some countries such as the UK inflation is substantially higher than it has been and closer to this equality than elsewhere. However both Euro-zone and US inflation is now rising. The ECB has now raised interest rates for the first time since the crisis. The US Federal Reserve has not yet done so; but it cannot be far off. As for the UK, a rise is surely imminent if the Bank of England is not to become a laughing stock.

Meanwhile emerging country central banks are trying all sorts of controls to prevent this tide of money from coursing through their economies. However, these efforts are futile in the end; as fast as the last tide has been ‘controlled’, the next one is rolling in and the operation has to be repeated. In the end, the controls cannot restrict the huge availability of money by back door or front. Corruption becomes rife as opportunities for massive profits from lending this money illegally become irresistible.

So far the main actors in this drama, western central banks, have been complacent about worldwide inflation because they think it is not their problem. However this must stop within the next year, it would seem, if inflation is not once more going to become embedded in expectations in the West as it has already in the East. As labour markets tighten, real wage cuts could well be reversed and this would temporarily add to future western inflation as the terms of trade losses are also reversed. Furthermore, these central banks must be concerned about the inflation they are indirectly causing in the East. They may complain that eastern central banks ‘ought’ to allow currency appreciation; but the fact is they do not. In these circumstances, western central banks are creating world inflation, which must spill over back to their own economies in time.

Accordingly, it is reasonable to look for a tightening of western monetary policy, and rising interest rates over the next two years. By the end of 2012, this ought to get world inflation under control. During 2012, there should be a general world slowdown. Growth in developed countries will therefore be slower even than now. Commodity prices will keep rising until the end of 2012 when they should start to level off; commodities are in short supply after the massive world growth of the 1990s and 2000s. Their shortage was the main factor in triggering the crisis of 2007 to 2009 and this shortage remains the underlying factor limiting world productivity growth. My recommendation for UK monetary policy is to raise Bank Rate at once by ½%, with a bias to further rises, and for QE to stop, with a bias to reversal (i.e. sales of the Bank’s portfolio of bonds).

Comment by David B Smith
(University of Derby and Beacon Economic Forecasting)
Vote: Raise Bank Rate to 1%; hold QE at present level.
Bias: To raise Bank Rate in repeated small steps until it reaches 2½%.

Recent newspaper interviews given by its officials suggest that the Bank of England has been so traumatised by the financial crash – and its consistent underestimation of future inflation – that it has lost its intellectual self confidence. Like Mr Micawber in Charles Dickens’s novel, the Old Lady of Threadneedle Street appears to be simply waiting for something to turn up – or rather, in this case, for CPI inflation to turn down spontaneously, without any action on the part of the Bank. Since the first duty of a Doctor is not to exacerbate the patient’s condition by inappropriate treatment, monetary inaction can be defended using the argument that the uncertainties are so great that anything that the MPC does risks doing more harm than good. One can sympathise with this view. However, if one looks back to the 1998 Bank of England Act, which established its operational independence, the Bank was given three specific responsibilities:
1) to hit the inflation target; 2) to maintain the stability of the banking system (in conjunction with HM Treasury and the Financial Services Authority), including acting as an effective lender of last resort, and 3) to nurture the wellbeing of the financial sector in order to maximise its contribution to the wider economy.

It is hard to avoid the conclusion that the Bank of England has significantly underachieved with respect to all three objectives. It is also time the ‘greedy bankers’ alibi for this underachievement was squashed on two grounds. First, bankers have always been ‘greedy’. However, this does not explain why the greed was allowed to get so out of hand in the first decade of the 21st Century, and why monetary policy was not tightened then – perhaps by a call for special deposits if the Bank was concerned that a rate increase would unduly strengthen sterling. Second, only some 5% of the 186 members of the International Monetary Fund (IMF) – or the 192 members of the United Nations (UN) – suffered from the incipient banking sector meltdown experienced by the UK and the US. Many comparable countries – including Canada and Australia – emerged virtually unscathed. An important reason for the inept British response to the 2008 global financial crisis was the tripartite dismemberment of the Bank that resulted from the 1997 settlement. This faulty institutional structure meant that no one was properly ‘minding the store’ and must take a large share of the blame. A concerted attempt is now being made to remedy the institutional problems caused by the 1998 Bank of England Act. However, people will need convincing that the UK monetary authorities: 1) now know what they are trying to do from an intellectual perspective, and 2) are in effective control of the situation.

One aspect of the general loss of nerve on the part of media and other commentators since the financial crash has been the tendency to over-interpret highly fallible official economic statistics and to react in a manic-depressive mode to random wobbles in the data. This is particularly true of the GDP figures where revisions are large, and there often appears to be no close predictive relationship between the official estimate of GDP on one base year and on another. This year, also, the ONS have announced that the annual ‘Blue Book’ changes to the national accounts will be so major that a breakdown of the expenditure and income measures of GDP in 2011 Q2 will not be available until 5th October. This will cause huge problems for anyone trying to monitor, let alone model or forecast, the UK economy during the intervening period. It may also be significant that, while the annual increase in the CPI fell from 4.4% in February to 4.0% in March before rebounding to 4.5% in April, the ‘double-core’ retail price index – which excludes both mortgage interest payments and house prices – has shown a far steadier course, going up by 5.8% in the year to February and the same 5.6% in the twelve months to March and April. This suggests that the reported CPI inflation rate has suffered from chance fluctuations, which should not be taken too seriously.

The UK’s fundamental problem is that the massive increase in the socialisation of the economy between 2000 and 2010, and Mr Osborne’s misguided decisions to raise VAT and implement Labour’s 50p income tax rate and higher national insurance contributions have severely damaged the supply side of the British economy. Pouring monetary stimulus into a supply-debilitated economy is a recipe for stagflation not growth. Britain’s economic openness also means that sterling has a far greater impact on the domestic price level than the MPC, with its over-reliance on an ‘output-gap’ model of inflation, has appreciated.

In contrast to the official approach, the properties of the author’s Beacon Economic Forecasting (BEF) macroeconomic model imply that a 1% decline in the exchange rate is associated with a 1% increase in domestic prices in the very long run. Furthermore, each 1 percentage point drop in the real interest rate differential in favour of sterling is associated with a 5.2% decline in the sterling index. This means that the Bank’s decision to ignore the reduction in the real rate of interest caused by rising inflation is placing downwards pressure on sterling and adding to the price level in the long run.

Fortunately, having shown a peak-to-trough contraction of 16% in the recession, the volume of UK private domestic expenditure, which is the subset of the economy on which monetary policy predominantly operates, had recovered by 5.6% from its 2009 Q4 trough by 2011 Q1. There are also encouraging signs that UK exports are benefitting from the marked recovery in the volume of world trade since its collapse in the Great Recession. My recommendation remains that Bank Rate should go up by ½% immediately and that it should then be raised in a series of small steps until a figure of 2½% or so is achieved. After which, there should be a pause for breath. If the economy does turn out to be weaker than expected, there would then be scope to use rate cuts once more to provide a monetary stimulus to the wider economy.

Comment by Akos Valentinyi
(Cardiff Business School, Cardiff University)
Vote: Raise Bank Rate by 100 basis points to 1½%.
Bias: To raise Bank Rate again.

The British economy is slowly, but steadily, recovering from the Great Recession. Output and employment are growing. Private business investment in manufacturing has been growing in the last two quarters faster than at any time since the 1990s. Similarly, private business investment in distribution services has been growing strongly since the second quarter of 2010. Investments in non-manufacturing production sectors and non-distribution service sectors are weaker. However, investment activity overall suggests that companies expect the demand for their product to grow in the future. The recovery is underway, and it is less fragile than many may claim.

Inflation is a cause for serious concern. The annual monthly inflation measured by the target CPI reached 4.5% in April. The picture is even darker if we consider the change is 1.1 percentage points higher now than it was in May 2010. Moreover, if we calculate a three-month moving average of the CPI, we then find that this figure has not only been rising since October 2010, but that it has been above target since December 2009.

It is also useful to look at the twelve CPI categories. Eight out of these twelve categories have higher annualised monthly inflation now than they did in May 2010. In contrast, only six out of these twelve categories had higher inflation in April 2010 relative to May 2009. Inflation is picking up speed and it does so in more and more CPI categories. Inflation is driven by expectations. The pattern of the UK inflation indicates that inflation expectations are picking up slowly. Once they do so, they will be very costly to break.

In my opinion, monetary policy should be tightened. My vote is for a 100 basis points rise in the official interest rate to give a Bank Rate of 1½%. Given the excess liquidity in the economy, this hike is unlikely to have significant implication for the real economic activity. It would signal that the policy maker takes inflation seriously, and would keep inflation expectations anchored. Experience shows that successful monetary policy requires a ‘conservative’ central banker, who never takes undue risks with inflation. Given the dynamics of inflation, a conservative central banker would now raise rates in Britain.

Comment by Peter Warburton
(Economic Perspectives Ltd)
Vote: Raise Bank Rate to 1%.
Bias: To raise Bank Rate again.

The thrust of the argument presented in the author’s earlier SMPC submissions for some time now has been that a delayed economic reaction to extremely favourable monetary conditions should not to be mistaken for a weak or insignificant reaction. Real short-term interest rates have plunged over the past year as inflation outcomes have greatly exceeded expectations. The UK forecasting consensus has been chasing the game on inflation for more than a year now. The average forecast for calendar 2011 CPI inflation has shifted from 1.7% in April 2010 to 4.1% in May 2011, according to Consensus Forecasts Inc. The Bank of England’s MPC has conceded, little by little, that the annual increase in CPI is unlikely to drop back into its 1% to 3% target range until 2013 at the earliest.

The materialisation of noticeable headline inflation this year has been common to all the seven leading industrial (G-7) economies. However, the UK strain of this particular virus remains more vigorous. While the UK has at least a greater potential for inflation to recede into 2013, this extended aberration translates into a steeper fall in real interest rates this year and next than elsewhere. This is one potential source of domestic economic stimulus. A second potential stimulatory factor for the UK is its high broad money to GDP ratio. While recent broad money growth trends have been weak, this correction leaves the trend growth of money, in relation to nominal GDP, on the same underlying growth path as the one that has been observed since 2005. A third source of potential stimulus is that the UK continues to derive competitive advantage from the depreciation of sterling in 2008-09. A phase of rapid unit labour cost growth eroded part of the advantage in 2009, but latterly these costs have moderated. Over the past year, the annual inflation rates of UK unit labour costs contrast favourably with those of other major economies.

The impact of unexpectedly high consumer price inflation on the purchasing power of employee remuneration has been progressive. Real average weekly earnings growth has declined from 2% in 2008 to minus 2% currently. It is anticipated that average earnings inflation will narrow the shortfall with the retail price inflation measure next year. However, for 2011, the employer has the upper hand, enjoying profit margin protection. This means that the final item on the list of potential stimuli is the fact that the financial surplus of private non-financial corporations (PNFCs) is running at an extraordinary and possibly unprecedented rate, equivalent to almost 5% of nominal GDP. Notwithstanding the poor terms on which small- and medium-sized enterprises can finance themselves externally, there is a plenitude of free cash flow in the wake of the fixed investment recession. Our relatively upbeat assessment of the prospects for the economy rests on the progressive disbursement of this surplus in higher corporate expenditures on equipment, labour and bought-in services.

It is a measure of the fear that the credit crisis has engendered that every ‘soft patch’ in the real economy data is greeted with predictions of gloomy relapse towards the deflationary abyss. This fear also plays a key role in maintaining the extraordinary laxity of economic policy. Rather than dwelling on the risks of a near-term relapse, it is more sensible to weigh the impact of the protracted engagement of extremely favourable policy settings. There are minimal risks to the UK economic recovery from a staged increase in Bank Rate. It is high time for the MPC to take its inflation mandate seriously.

Comment by Mike Wickens
(Cardiff Business School)
Vote: Raise Bank Rate to 1%.
Bias: Then to hold.

Over the last few months - including the last month - the dilemma for monetary policy has steadily worsened: inflation has continued to increase and is now more than double the target rate, while output has fallen, if anything. To make matters worse, the MPC has forecast that inflation will rise further and the OECD has recently revised downwards its growth forecast for the UK. With inflation driven by rising costs and demand stagnant, this is a classic stagflation.

The MPC, however, does not appear to see it this way. Each month it forecasts that inflation is about to fall and so a tighter monetary policy is deemed unnecessary. The government – which appears more concerned with output than inflation and is, perhaps, conscious that the VAT increase has caused prices to rise and the expenditure cuts are about to come through - has not objected to the MPC’s persistent reluctance to tackle inflation despite its mandate. The MPC has claimed that much of the higher inflation is imported as a result of higher world food and fuel costs and so there is little that the MPC can do about it. It is therefore striking that other European countries have had lower inflation and higher growth despite facing the same world prices for commodities.

A possible explanation for the difference is that while the euro has got stronger, sterling has got weaker. This contrast is likely to widen as the ECB has decided to tighten monetary policy even though it would worsen the fiscal stances of the heavily indebted nations in the Euro-zone by raising debt-service costs. If the MPC takes its mandate seriously, there seems to be no alternative to raising rates in the UK too in order to strengthen sterling and reduce the domestic price of imported goods and services. The dilemma for macroeconomic policy more generally is that this would hit exports the hardest, which has been the best performing sector due to sterling’s weakness. In the absence of a clear guideline from the government on how to resolve this dilemma, one can only presume that the Chancellor of the Exchequer is content to live with the higher inflation. The Chief Economist at the Bank of England has hinted at higher interest rates in the not too distant future. The danger is that this is left so long that much higher interest rates will then be required than if there were a timely, but small, increase immediately.

Comment by Trevor Williams
(Lloyds TSB Corporate Markets)
Vote: Hold.
Bias: Neutral.

The revised ONS figures show that UK economic growth in the first quarter was 0.5%, the same as the previous estimate. Over the six months to March 2011, however, the economy was flat. Given the severity of the downturn – when output fell by over 6% peak to trough – this is a pretty poor performance. There was some good news in the data: rebalancing away from domestic demand might finally be underway. Growth was driven by a 1.7 percentage point contribution from net exports, the largest single quarter boost post war. Volume exports rose by 3.7% in total, while volume imports fell by 2.3%. Now, this might not be repeated in the second quarter but it took the goods and services deficit to its lowest level since 2001. And exports are rising faster than at any time since the export boom post the UK’s expulsion from the European Monetary System in 1992.

However, the rebalancing of the economy should also mean that investment rises with net exports, and this is not happening yet. Instead, investment fell by 4.4% in 2011 Q1, after a fall of 1.8% in the final quarter of 2010. Moreover, government spending contributed 1% to growth in the first quarter. With the cuts in spending just about to kick in, the prospects for strong economic growth are still poor. Growth this year is now on track for 1.5%, little different from the 1.4% recorded last year. For 2012, a combination of weak consumer spending, held back by continued private sector balance sheet restructuring, and public sector debt reduction, suggest little more than 2% or so economic growth at best.

Hence, the overriding message from UK data in the last few months is that the pace of the recovery is slowing. This is why financial market expectations of interest rate hikes have fallen back so sharply, despite the rise in inflation in the interim. In the year to April, CPI inflation was 4.5%, up from 4% in March and well above the 2% target. In this weak growth environment, higher prices are not translating into higher pay, so unit labour costs are low, keeping price pressure weak in the medium term and helping export competitiveness.

Looking at other inflation indicators – such as pay settlements, the level of unemployment and demand for skilled workers – suggests that wage inflation pressure will remain low for some time. Add in the recent data for broad money expansion – a fall of 1.1% in the headline rate of M4 in the year to March and growth of just 1% in the three month annualised rate of M4ex excluding other financial institutions – and the picture is one of severe constraints on the ability of the economy to generate inflation in the true sense. That is, continually rising prices led by demand or wider profit margins, rather than once-and-for-all shifts in the price levels caused by changes in excise duties, VAT and commodity prices. Without these influences, CPI inflation would be close to the 2% target.

For these reasons, my vote is to keep rates on hold at 0.5% for now. If the Bank of England's preferred measure of M4ex money supply turns negative, the MPC may even have to do more QE. However, the risk is that inflation two years ahead becomes an issue later on this year. This prospect could then mean a rate rise will be necessary, but only if the economy is recovering in a sustainable way by then.

Note to Editors

What is the SMPC?

The Shadow Monetary Policy Committee (SMPC) is a group of independent economists drawn from academia, the City and elsewhere, which meets physically for two hours once a quarter at the Institute for Economic Affairs (IEA) in Westminster, to discuss the state of the international and British economies, monitor the Bank of England’s interest rate decisions, and to make rate recommendations of its own. The inaugural meeting of the SMPC was held in July 1997, and the Committee has met regularly since then. The present note summarises the results of the latest monthly poll, conducted by the SMPC in conjunction with the Sunday Times newspaper.

Current SMPC membership

The Secretary of the SMPC is Kent Matthews of Cardiff Business School, Cardiff University, and its Chairman is David B Smith (University of Derby and Beacon Economic Forecasting). Other members of the Committee include: Roger Bootle (Deloitte and Capital Economics Ltd), Tim Congdon (International Monetary Research Ltd.), Jamie Dannhauser (Lombard Street Research), Anthony J Evans (ESCP Europe), John Greenwood (Invesco Asset Management), Ruth Lea (Arbuthnot Banking Group), Andrew Lilico (Europe Economics), Patrick Minford (Cardiff Business School, Cardiff University), Gordon Pepper (Lombard Street Research and Cass Business School), Akos Valentinyi (Cardiff Business School, Cardiff University), Peter Warburton (Economic Perspectives Ltd), Mike Wickens (University of York and Cardiff Business School) and Trevor Williams (Lloyds TSB Corporate Markets). Philip Booth (Cass Business School and IEA) is technically a non-voting IEA observer but is awarded a vote on occasion to ensure that exactly nine votes are always cast.

The central debate is about whether Britain's fiscal tightening is killing the economy and the comparison is made with America's more relaxed attitude towards its budget deficit (which is causing concern at the rating agencies).

Looking at the latest numbers, you might conclude that it was America which is introducing tough, growth-stunting measures, rather than Britain. Most recent US data has been notably weak, culminating in today's payroll numbers, which showed a rise of only 54,000 in non-farm jobs in May and a rise in the unemployment rate from 9% to 9.1%.

What about Britain's slowdown? This week we've had a fall in the manufacturing purchasing managers' index, a rise in the construction PMI and a small drop in the service-sector index. All three are consistent with expansion. Markit, which produces the numbers, says they are consistent with only a 0.3% second quarter rise in gross domestic product.

That may be understating it, given that the Office for National Statistics has to apportion construction growth somewhere, following its strange first quarter numbers. Given that the first half of 2011 was always the period of greatest risk in the recovery, however, 0.5% followed by 0.3% wouldn't be that disastrous.

Separating the underlying trend in manufacturing from the impact of extra bank holidays, supply-chain disruptions in Japan and other temporary factors is tricky but growth does appear to be weakening, mainly as a result of very subdued domestic demand. The purchasing managers' index for manufacturing dropped from a downward revised 54.4 in April to a 20-month low of 52.1 in May.

Markit, which produces the index for the Chartered Institute of Purchasing and Supply, offered this interpretation: “The UK PMI suggests that manufacturing has moved from rapid expansion to near-stagnation. The headline index slipped to a twenty-month low in May as production and new orders contracted slightly following near-record growth in the opening quarter. Domestic market weakness was the main drag on order books and output. However, this was exacerbated by the additional bank holidays in late April, which fell during the early part of the latest survey period, and ongoing supply-chain disruption following the Japanese earthquake. Consumer goods producers and small-scale manufacturers have been hit hardest by the slowdown.

“On the plus side, job creation held up comparatively well in May, while inflation of input costs and factory gate prices moderated following recent declines in the price of oil and other commodities. However, continuing the increase in employment will be reliant on the trends in order books and output improving.”

Everybody knows that household incomes are being squeezed hard now but not many people know that the squeeze started before the crisis. A new report from the Resolution Foundation, "Growth Without Gain?" produces the striking result that average (median) incomes in 2015 will be no higher than in 2001. It also highlights the fact that there was no rise in real incomes between 2003 and 2008.

Let me take a look at that, beginning with the 2003-8 claim. Median full-time earnings grew by 18.6% between 2003 and 2008. This was comfortably ahead of consumer price inflation over that period, 11.3%, but many people (and the Resolution Foundation) prefer the retail prices index, which rose by 18.1%. So only a fractional rise in real median full-time earnings.

Sometimes, however, the choice of time period can be quite important. 2008 saw a spike in inflation, which rather affects the story. If we take, for example, the 2003-9 period, median earnings rose by 21%, retail prices by 16.7%. A more significant rise in median real earnings.

What about the claim that median real earnings in 2015 will be no higher than in 2001? This is based on official forecasts from the Office for Budget Responsibility, which project a very wide gap between RPI and CPI inflation throughout the forecast period - 1.5 to 2 percentage points in terms of inflation rates. Will that happen? Who knows? But it would be unusual. The Resolution Foundation's interesting report is here.

The Nationwide Building Society said house prices rose by 0.3% in May, more than reversing their 0.2% fall in April, for a rise of 0.6% over the latest three months. Prices in May were, however, 1.2% down on a year earlier. Turnover remained weak and Nationwide said: “Overall, the modest pace of house price growth in May suggests that the property market is continuing to mirror the lacklustre trends evident in the wider economy." More here.

More impressive was the bounce in consumer confidence reported by GfK-NOP. It jumped 10 points in May to -21, prompting Nick Moon of NOP to say: “We have seen an almost unprecedented jump in consumer confidence this month. May’s figures show the second largest rise ever – only May 1993 was higher, when it improved by 12 points. In the 449 months that the index has been running, single-month movement on this scale – either up or down – has only occurred on ten occasions.". This could be significant. The weakness of consumer confidence this year has been a big concern for policymakers.

The second estimate of GDP for the first quarter would only have been revised if there had been new news on the production side. As it was, a downward revision of non-manufacturing industrial production was offset by an upward revision of construction data (which still look strange at 4% down on the quarter) to leave the quarterly GDP rise unchanged at 0.5%.

On the expenditure side, household spending is very weak - down on a year earlier - while net exports and investment are making a contribution to growth (although investment in the latest quarter suffered a construction-related plunge). The growth on the quarter in manufacuring, 1.1%. and services, 0.9%, still points to a better rate of growth than 0.5%. More here.

The good news in the latest public finance figures was that public sector net borrowing for 2010-11 was revised down to £139.4 billion, £6.5 billion below the Office for Budget Responsibility's March forecast and some £17 billion below the outturn for 2009-10.

The bad news was that borrowing for April 2011, £10 billion, was well up on the £7.2 billion figure for April 2010. There are, as always, special factors but the big picture is that spending is still rising quite rapidly in cash terms. More here.

The timing of Easter and the royal wedding helped retail sales to a 1.1% volume increase in April, up 2.8% on a year earlier. Sales value showed a 6.2% year-on-year rise. Probably a fairer picture is provided by the three-monthly volume data; up 0.2% on the previous three months and 1.6% on a year earlier. More here. The Nationwide said consumer confidence in April remained close to March's lows, which were similar to the all-time recession lows.

A drop of 36,000 in the unemployment rate to 2.46m, and a drop in the unemployment rate from 7.8% to 7.7% in the January-March period was good news. Employment rose by 118,000 in the first three months of the year and by 416,000 over 12 months. It is only 332,000 below pre-recession levels. More details here.

The minutes of the May meeting of the Bank of England's monetary policy committee, also released, showed a 6-3 vote in favour of holding Bank rate at 0.5%, with one member, Adam Posen, again favouring a further £50 billion of quantitative easing. Expectations had been that one or more of the three hikers would change their vote after the first quarter GDP figures but they did not. For the MPC's hawk, Andrew Sentance, this was his last meeting. For the six in the majority, there will be a case for higher rates in time, but not yet. The minutes are here.

It was indeed a lull. March's inflation rate of 4% (still double the official target) offered a hope of this year's inflation outturns getting better. That was dashed by the April number, 4.5%. It would be reassuring if you listened to the Office for National Statistics' line that a lot of this was to do with the timing for Easter, which is no doubt correct. On the other hand, we have the Bank of England itself warning that inflation will hit 5% later this year. More here.

Mervyn King's letter to George Osborne in response does not, unsurprisingly, break any new ground following last week's inflation report. We will know more about the wide range of views on the MPC tomorrow, when the minutes are published. But the arguments in the letter - particularly the claim that inflation would be below target if not for VAT, energy prices and import prices - are looking rather tired. The letter is here.

Whichever way you look at them, the French and German GDP figures are stunning, with first quarter rises of 1% and 1.5% respectively, compared with just 0.5% in the UK. German GDP is up by an adjusted 4.9% on a year earlier. Both quarterly rises followed increases in the fourth quarter of 2010, of 0.3% and 0.4% respectively. So if the UK has been flat over six months - on the official figures at least - these economies have grown significantly. This will further energise the UK debate.

The National Institute's record in predicting the GDP figures has been pretty ropey recently but its latest estimate, that GDP growth in the three months to April was just 0.3%, chimes in with other evidence of modest growth. The National Institute (of Economic and Social Research) produced its estimates, as usual, after the release of the latest industrial production figures, here, which were disappointing.

"In today's Report, the recent pattern of revisions of projections over the next year - downward to growth and upward to inflation - has continued," said Mervyn King. "But looking further ahead, the horizon relevant for policy, the big picture has not changed much since February."

The big picture is that inflation will be above target through next year as well as this, and that the 1.5% growth the Bank expected over Q4 2010 and Q1 2011 together did not happen. If there was one word used more than any other it was uncertainty, although King was certain that Bank rate will have to go up at some stage.

Labour will seize on the weakness of growth as evidence that the coalition strategy is failing. More here.

The effect of the timing of Easter did not get enough attention when the retail sales figures were published a month ago, but the impact is clear. Today the British Retail Consortium says like-for-like sales in April were 5.2% up on a year earlier while total sales rose by 6.9%. It still detects a weaker trend, sales up only 0.1% like-for-like in latest three months (1.8% total) but this was a good bounce. More here.

Meanwhile RICS - the chartered surveyors - said more sellers are coming onto the housing market, as are more buyers (though rising by less). House prices fell at their slowest rate since June last year.

It was the Halifax which led the way with sharp monthly falls in house prices three years ago, so April's 1.4% drop will make some people sit up and take notice. Note that many media outlets are reporting this as a 1.2% fall, but that is the drop over the latest three months. On this basis prices were 3.7% lower than a year earlier.

Most evidence we have suggests a gradual softening of prices rather than an big fall, so this many be an outlier. Indeed the Halifax is examining its methodology. Martin Ellis, its housing economist, interprets what's happening as modest decline: "The latest figures show that the underlying trend in house prices continues to be one of modest decline. Prices in the three months to April were 1.2% lower than in the previous three months. There was a 1.4% fall in prices in April following no change in March." More here.

The producer price numbers look pretty awful, with output price inflation at 5.3% and input prices up a scary 17.6% on a year earlier after another surge in April. Details here. There's now a light at the end of the tunnel, if yesterday (and today's) fall in oil and other commodity prices is sustained. Brent crude currently sticking below $110 a barrel.

The May decision to keep Bank rate at 0.5% and the amount of quantitative easing at £200 billion was, in the end, no surprise. Much stronger GDP data and a much higher April inflation reading would have been needed to provoke a rise.

With Bank rate on hold for the 26th month, and at a record low, the Bank is making history. You have to go back to the period October 1939 to November 1951 for a longer period of unchanged rates. Half of that was in wartime but the whole of Clement Attlee's peacetime premiership occurred under unchanged Bank rate. It must have been quite a moment in November 1951, when the rate was eventually raised, from 2% to 2.5%.

Following declines in the manufacturing and construction purchasing managers' indexes, there was also a significant drop in the service sector PMI, from 57.1 to 54.3, suggesting a slowdown across the board. This was attributed to the impact of the spending cuts.

The details, however, look reasonably perky, as described by Markit and the CIPS: "Following March's surge, growth of the UK service sector eased in April but nonetheless remained marked as levels of new business rose to the greatest extent in over a year."

Amd: "Despite the slowdown, attributed by a number of panellists to government budget cuts, growth of the service sector remained solid." Overall, Markit thinks its surveys are consistent with modest, 0.4% quarterly GDP growth.

House prices slipped by 0.2% in April, according to the Nationwide building society, and were down by 1.3% on a year earlier. In cash terms prices are flat but factor in inflation and a real price fall is occurring of perhaps 5%-6%. This is the kind of adjustment we saw in the first half of the 1990s. Interestingly, Nationwide now has real house prices below their long-term trend. More details here.

Housing is not helping the wider economy. According to Markit and the CIPS, the construction purchasing managers' index dropped from 56.4 in March to 53.3 in April, with weak housebuilding and civil engineering to blame for this slowing in the pace of growth. The construction numbers were similar to those for manufacturing, suggesting a slower start to the second quarter.

Manufacturing has been driving the recovery so the news that the purchasing managers' index for the sector dropped to a seven-month low of 54.6 in April is not good. Domestic orders appear to be the culprit but one or two doubts have also crept in about the global recovery. Manufacturing is still growing but more slowly than it was at the start of the year, when the index was over 60.

Meanwhile, a balance of 21% of retailers said high street sales were up on a year earlier in the first two weeks of April, according to the CBI, but expectations for May are much weaker. The CBI's distributive trades survey is hit by unfortunate timing. The first two weeks of April excludes Easter, while the first two weeks of May will exclude most of the recent splurge of holidays. More here.

A 0.5% first quarter rise in gross domestic product looks disappointing but, given the record of the Office for National Statistics it could have been a lot worse (or better) and the underlying picture was rather stronger. Service sector output grew by 0.9% in the quarter and manufacturing was up by 1.1%. That suggests an underlying growth bounce of close to 1%.

So why only 0.5%? An odd-looking 4.7% drop in construction output (which looks like a carry-over from Q4 2010), a shutdown in North Sea production and a 3.5% drop in utilities' output - reflecting milder weather - dragged down the overall number.

It is wrong to say the economy didn't grow taking the fourth and first quarters together. Some of the snow losses of Q4 were never going to be made up. Even with these numbers, 1.8% growth over the past 12 months is not bad. More here.

As time has gone on, Andrew Sentance's arguments in favour of higher interest rates have got stronger and more sophisticated. As he says in today's speech, what started as tactical differences have evolved into something more fundamental. He disagrees with the monetary policy committee majority on the global economy, the role of sterling, the output gap and infllation expectations. His speech is here.

A flavour of his conclusions: "The MPC is now approaching its fifteenth year and has provided the UK with its most durable framework for monetary policy since the 1950s and 1960s. And it is a great credit to our current system that it has shown that it is capable of dealing with some formidable challenges. In my time on the Committee I believe our most significant achievement has been to help to stabilise the UK economy in the wake of the global financial crisis and provide a platform for economic recovery. I am very proud to have been able to contribute to the policy discussions and decisions which led to that outcome. But the rapidly changing world economy we now inhabit is always throwing up new challenges. And now the MPC faces the task of bringing inflation back to target in the face of continuing global inflationary pressures, with the recent experience of persistent above-target inflation providing an unhelpful backdrop.

"A great strength of the MPC is that its members can honestly express differences of view in an open and transparent way, and that means we are not forced to agree and minority opinions are respected. Over time, that should make for a better decision-making process. So while I have not been in agreement with the majority view on the Committee over the past year, I hope that the arguments I have made have not been in vain. And I suspect the issues I have raised in today’s speech – the impact of the global economy and the pound, the role of the “output gap” and the importance of expectations and credibility – will continue to be key issues for the MPC over the years ahead, as the Committee continues in its vital role of maintaining monetary stability in the United Kingdom."

The CBI's industrial trends survey is an important indicator and today's speaks to several parts of the current debate. Manufacturing is still enjoying a decent recovery though there is some evidence of a weakening in the pace of that recovery. The survey's employment balances are at their best since 1974, suggesting the sector is recruiting significantly.

The worry is inflation, with domestic prices rising at their fastest rate since 1995 and export prices since 1985. Price expectations are at their highest for 21 years. That March fall in inflation may have taken the heat out of the interest rate debate too soon. More here.

Following dire warnings from the British Retail Consortium there was a pleasant surprise in the retail sales figures, with sales volume up by 0.2% on the month and 1.3% on a year earlier. Sales value, which the BRC measures, was up by a hefty 4.5% on the Office for National Statistics' figures. It is, to be fair, a very mixed picture, as the ONS says. Computer and technology stores are doing well, as are internet retailers, while household goods stores are doing very badly, presumably reflecting housing weakness. More here.

Meanwhile, there was a welcome undershoot on public borrowing for 2010-11. The outturn of £141.1 billion compared with £156.5 billion in 2009-10 and the Office for Budget Responsibility prediction of £145.9 billion. Given that many expected a higher 2010-11 number than in 2009-10, this was pretty good (to the extent that borrowing on this scale can ever be regarded as good news). More here.

The 6-3 vote for no change in Bank rate this month was no surprise and is likely to be repeated again in May. The Bank is wrestling with a number of factors - the weakness of consumer spending (in spite of the need for rebalancing), the prospect of an upward revision in its inflation projections in May and the puzzling strength of imports.

Having looked to be moving towards a hike, the tone of the latest minutes suggests the monetary policy committee is some way away. The markets don't expect a move until the autumn. The minutes are here.

The latest labour market statistics are encouraging, following better-than-expected inflation numbers. Taken together with the trade figures, this is turning into a good week for the economy.

Employment in the December-February period was up by 143,000 in the December-February period compared with September-November. The unemployment rate fell from 8% to 7.8% as unemployment fell by 17,000 over the period. The claimant count was flat in March, up by just 700 to 1.45 million.

Though we do not yet have any figures for the early months of 2011, it looks as though the picture for 2010, in which private sector jobs' growth easily exceeded public sector cuts, is holding up. Average earnings growth excluding bonuses slipped from 2.3% to 2%, half the rate of inflation. More here.

For once there was a logic in the latest data releases. Overnight the British Retail Consortium told us that there was a record drop in retail sales value in the 12 months to March, 1.9%. Weak demand should mean inflationary pressures ease and, sure enough, consumer price inflation dropped from 4.4% in February to 4% in March.

It is hard to understate the importance of this release for the Bank. It provided a reminder that not all the inflation surprises are on the upside - the markets had expected no change in the rate - and it provided hope that eventually inflation can come back down in a decisive way.

Retail price inflation eased from 5.5% to 5.3%, CPI inflation excluding indirect tax changes dropped from 2.8% to 2.5% and CPI at constant tax rates from 2.7% to 2.4%. Though the biggest reason for the inflation drop was a record fall in food prices, which are volatile, this was good news. More here.

Completing the picture was a drop in Britain's trade deficit to £2.4 billion in February, from £3.9 billion in January. Weak demand should trim imports, at a time when exports are benefiting from global strength. More here.

An executive summary of the Independent Banking Commission's interim report is available here. Much of what the Commission says makes sense and should make the banks safer. Putting riskier activities into separate subsidiaries and requiring more capital is preferable to break-up. I still have doubts about orderly resolution - winding down troubled institutions in a way that avoids systemic damage and recourse to taxpayers.

When a bank or one of its divisions gets into trouble, it is unlikely because of an isolated event only affecting that bank or division. Systemic problems are likely to be the cause. The Vickers' reforms should help prevent such problems but when panics start, all bets are off.

After more than two years of a 0.5% Bank rate, a rise is plainly closer than it was. Even so, it is hard to remember a month when expectations of a move were lower. So on hold at 0.5% (again) and quantitative easing maintained at £200 billion. May will be closer but the markets don't currently expect a move, European central Bank hike from 1% to 1.25% or not.

A flat manufacturing output number and a 1.2% drop on overall industrial production in February were not in the script and should have snuffed out any faint prospect of a hike in Bank rate this week. Industrial production was hit by North Sea maintenance but the weakness - relatively - of manufacturing was harder to fathom.

The good news is that manufacturing still showed a healthy 4.9% growth over 12 months, while overall industrial production was up by 2.4%. Taking January and February together, both series were above their fourth quarter averages. More here.

Reading the economy from the surveys is never easy. The Chartered Institute of Purchasing and Supply and Markit have come up with a strong service sector purchasing managers' index for March. It rose from 52.6 in February to 57.1 and, reassuringly, firms raised their prices at a slower rate.

This was Markit's summary: "UK service sector activity growth surged in March to its strongest for thirteen months, as companies benefited from improved business conditions, higher sales and increased enquiries. Capacity levels were tested, leading to a slight rise in employment for the first time in nine months. However, optimism regarding future activity was slightly down since the previous month.

"On the prices front, input costs continued to rise at a marked pace, with the rate of inflation only slightly lower than January’s two-and-a-half year peak. Nonetheless, the degree of pass through remained muted – output charges rose at their slowest pace of the year so far."

This upbeat survey, said to be consistent with 0.8% first quarter growth, contrasted with a downbeat British Chambers of Commerce survey. It described its first quarter survey as disappointing, with the recovery mediocre. Its press release can be accessed here.

The purchasing managers' index for manufacturing fell in March, suggesting that while the sector is still expanding fast, it is being hampered by weak consumer demand and, possibly, slower growth in export markets. It is still the hot sector of the economy, but slightly less strong than it was. This is Markit's take:

"The seasonally adjusted Markit/CIPS UK Manufacturing PMI™ fell to a five-month low of 57.1 in March, down further from January’s record high of 61.2, but well above its long run average of 51.3. The PMI has signalled expansion in each of the past twenty months.

"Work on new and existing contracts led to a solid increase in UK manufacturing output in March. Over Q1 2011 as a whole, output growth was the fastest since Q3 1994. However, the latest survey period saw the rate of expansion slip to a five-month low, mainly reflecting a sharp slowdown in new order growth.

"Incoming new orders rose at the weakest pace since last October. Companies continued to report higher order intakes from domestic and overseas clients, but noted that inflows from both sources were less marked than in recent months. The extent of the easing was centred on the domestic market, particularly in the consumer goods sector."

It may be a very low activity market - and likely to remain so - but house prices aren't doing much either. In fact, according to the Nationwide building society they have been as flat as the proverbial pancake over the past 12 months. A 0.5% rise in March put prices 0.1% up on a year earlier. More details here.

Things aren't going to change much in terms of credit availability, according to the Bank of England's credit conditions survey. Credit supply is slowly increasing but not so you would notice. For business, there is better availability for large firms but no change in the picture for small and medium-sized enterprises. The survey is here.

The Office for Budget Responsibility raised eyebrows with its prediction of a 0.8% bounce in gross domestic product in the first quarter and, in truth, only something bigger than the 0.5% fourth quarter drop will do.

For the OBR, and the rest of us, it is a case of so far, so good. Service sector output rose by 1.3% between December and January, to a level 0.6% above its fourth quarter average. If the service sector does no better than hold at these levels it will make a good contribution to Q1 growth. Also today, the CBI said retailers are having a pretty good March. The service sector data is here.

Some interesting aspects to the second revision (the third release) of the fourth quarter gross domestic product data. Household disposable income fell by 0.5% in Q4. matching the revised drop in GDP. GDP grew by 1.3% in 2010 (just) on the basis of the revised figures.

What's striking about the household income figures is how much they jump around. So the quarterly sequence during 2010 was plus 0.3%, minus 1.4% (a quarter when GDP grew by 1.1%), plus 0.5%, minus 0.5%.

If you were to conclude that it is hard to get a handle on the disposable income numbers you would be right. There was similar volatility during 2009. The big picture of a squeeze on incomes remains intact, as does the fact that we are still waiting for net trade to boost growth. Gross domestic expenditure was flat in the fourth quarter. More here.

Martin Weale of the Bank of England's monetary policy committee has given a speech on "Uncertain Uncertainty". Interesting and, as far as the markets are concerned, he is sticking to his call for a rate hike. The speech is here.

George Osborne might have hoped for better news either side of his budget than Tuesday's inflation figures and today's retail sales numbers. These showed a drop of 0.8% in sales volume, following January's downward-revised 1.5% increase. Taking January and February together, sales volume was 0.5% higher than the average for the fourth quarter of 2010. Assuming there is not another fall in March, there will be modest first quarter growth.

The overall retail sales picture is a bit odd. Sales value in February 2011 was a healthy 5% up on a year earlier. Take out inflation and that reduces to volume growth of just 1.3%. Sales volume for food stores was down 2.2% over 12 months (puzzling), while non-food was up 2%. Are we eating less in the age of austerity? More here.

There are three elements to George Osborne's second budget, the budget document itself, The Plan for Growth and the Office for Budget Responsibility's Economic and fiscal outlook. All three, and supporting documentation, can be accessed here and here.

What can one say amid all the reams of analysis? Politically it looked quite astute. Fuel prices are a toxic political issue and both cancelling the planned 5p petrol duty rise and going further with a 1p cut was smart. Unless oil prices fall below $75 a barrel the fuel duty escalator won't be reactivated in this parliament. North Sea companies, who are paying for the chancellor's largesse, will of course hate it.

The other household-friendly measure was the promise to go further towards the target of a personal tax allowance of £10,000, with an increase to £8,105 from April next year. There will be a corresponding increase in the higher rate threshold to avoid more taxpayers being dragged into the higher rate net.

For business, apart from North Sea oil companies who will pay for the fuel duty concessions, there was quite a lot, notably the new aim of getting corporation tax down to 23%, lifting lifetime entrepreneurs' relief to £10m, and the creation of 21 (as opposed to the expected 10) enterprise zones.

The growth forecasts from the Office for Budget Responsibility will be criticised for being optimistic, though not excessively so. The OBR needs a growth bounce of 0.8% in the first quarter to achieve its prediction of 1.7% this year. Next year it has 2.5%, followed by 2.9% in both 2013 and 2014. There will be debate about that, particularly as high inflation has forced up its medium-term borrowing numbers.

In theory it would be possible for the nine different members of the Bank of England's monetary policy committee (MPC) to vote in nine different ways. In practice, the current four-way split - one 0.5 point hike (Sentance), two 0.25 (Weale and Dale), five no change and one for more quantitative easing (Posen) - is about as divided as it gets.

This is quite an interesting paragraph: "For several months, one of the key risks to the inflation outlook had been that the persistence of inflation above the 2% target might cause businesses and households to expect higher inflation in future, leading them to set higher prices and wages, and making it more costly for the Committee to meet the inflation target in the medium term. The increase in oil prices during the month had exacerbated that risk."

And this suggests that some but not all of the five "no-changers" are getting a bit uneasy: "There remained differences of view between these members on the likelihood of the upside risk associated with an increase in inflation expectations materialising. Some thought that this risk remained limited, given that the near-term outlook for inflation could be explained by reference to changes in energy and other
commodity prices, VAT and the sterling exchange rate. Others thought that this risk had risen, given further upwards revisions to the near-term outlook for inflation, and that the case for an increase in Bank Rate had strengthened in recent months."

We can guess that Mervyn King is in the former category. The question is how many are in the latter. The minutes are here.

Perhaps very good public finance data for February would have been too much of a temptation. Even so, the numbers were disappointing, with net borrowing of £11.8 billion in February compared with £9.5 billion in February 2010. The cumulative undershoot compared with last year is still a significant £13.1 billion on net borrowing but only £4.8 billion on the current budget deficit. So an undershoot, but these are still very big numbers. More details here.

In contrast to the disappointing public finances (and inflation) data, the CBI had some cheer. Its industrial trends survey showed domestic orders' balances at their best since March 2008 and output expectations their best since February 2007. More here.

The Bank of England's trials and tribulations continue. 4.4% consumer price inflation - at a time of weak retail demand - and 5.5% retail price inflation are embarrassingly high numbers, and they won't get better (may get worse) any time soon.

These figures won't make any of the monetary policy committee's rate hawks change their minds and could persuade others to join them. May is the key month still, I think, though there'll be tension around the April meeting.

Not much reassurance in the detail. The only component of the CPI showing annual inflation of less than 2% is recreation and culture, 1.3%, all the others are significantly above. CPIY, excluding indirect tax changes, is now up to 2.8% (from 2.4% in January), CPI at constant tax rates is 2.7%. Details here.

Consumer confidence was very weak last month, according to the Nationwide Building Society. Its index fell by 10 points to 38 between January and February, to its lowest level since the index began in 2004. That's not a very long track record but it does cover the period of the worst post-war recession.

The index isn't yet up on the Nationwide website, but spending intentions and consumer expectations were particularly weak. High inflation, rising taxes and fear of spending cuts are taking their toll. The squeeze on incomes is going down like a lead balloon with households, even without international instability.

Another set of fairly benign labour market numbers, suggesting a winter surge in unemployment has been avoided. Though the Labour Force Survey unemployment rate edged up to 8%, the rise over the latest three months, 27,000 to 2.53m, was modest.

LFS unemployment remains locked at close to 2.5m, as it has been for more than 18 months, while the claimant count dropped by 10,200 in February to 1.45m.

Employment rose by 32,000 to 29.16m in the latest three months, rising private sector employment compensating for a fall in the public sector total. While the Office for National Statistics is still claiming a dubious "record" for youth unemployment, another record was that employment among 50-64 year-olds hit 7.32m, up 25,000 on the quarter, while employment among over-65s was a record 900,000, up 56,000 on the quarter. The young will no doubt think the old are taking their jobs, but a lot of this is due to this age group getting older and staying longer in work.

Earnings growth including bonuses rose from 1.8% to 2.3%. Excluding bonuses it was 2.2%, down from 2.3%. More here.

There are bigger issues in Japan, but we shouldn't lose sight of other things. This IPPR report on Britain's housing shortage is a reminder of a long-term problem.

It says: "IPPR analysis shows how housing demand responds to three different economic scenarios and projects that even a faltering economy will lead to demand for more than 200,000 additional homes each year. The best case scenario for the economy will require more than 280,000 extra homes each year. But if housing supply continues at the rate of the last twenty years – around 160,000 additions per year – the gap between the number of households and the number of available homes ranges from 255,000 and 1.2 million by 2025."

When Bank rate does eventually go up, it will shake us out of our slumbers. The second anniversary of 0.5% Bank rate has passed without incident. No change, no surprise. May still looks like the earliest.

Other parts of the economy can only envy the boom manufacturing is enjoying, admittedly after a nasty recession. the 12-month growth rate for manufacturing in January confirmed the sector's bounceback after December weather effects. Monthly growth was 1%. Some parts of manufacturing are enjoying extraordinary annual growth rates - of as much as 36%.

Overall industrial production rose by 0.5% in January, for a 4.4% 12-month rise. January's index level was 1.1% above the fourth quarter average, suggesting it will make a strong contribution to first quarter GDP growth. More here.

Maybe it was too early to write off the export-led growth story. January's overall trade deficit narrowed to £3 billion, from £5.5 billion (revised up from an initial £4.8 billion) in snow-distorted December. All of this - and slightly more - came from a narrowing of the deficit on goods from £9.7 billion to £7.1 billion.

Underlying export volumes rose by 6.1% in January, while imports rose by 1.9%. Compared with a year earlier, export volumes were up by 13.9%, while imports were up by 9.7%. Moving in the right direction. More here.

The British Retail Consortium says stores had a weak February, with overall sales up by just 1.1% on a year earlier, while like-for-like sales were down 0.4%. Remember these are figures for sales value, so the udnerlying picture was weaker. As it was the BRC said this was the softest performance since May 2009.

Food sales held up better than non-food, suggesting either that higher VAT depressed non-food sales, or that higher food prices (and petrol) diverted spending away from discretionary items. There's tentative evidence that the very recent picture is a little stronger but these were weak figures. More here.

The appointment of Ben Broadbent as the latest member of the Bank of England's monetary policy committee (MPC) is controversial for two reasons. 1. He's not a woman, so the MPC remains the preserve of middle-aged men. 2. He's from Goldman Sachs.

He is, however, a very good economist. He won't be as hawkish as Andrew Sentance, but he will approach the rate debat from the same side of the fence. This is from a piece he wrote for the FT on February 9, under the headline "Expect King to Raise Rates Sooner Rather Than Later".

"With inflation rising and growth stalling, Mr King faces a dilemma about how to respond. The situation is less bad than headlines suggest. Recent negative growth in the UK was a weather-related blip, while strengthening global growth and a weak exchange rate will absorb some of the fiscal consolidation. In short, it looks as if rates should rise sooner than Mr King would like ...

"Surveys suggest the credit crunch may have damaged productive capacity to a greater degree than first thought. More importantly, the rise in commodity prices might be part of an continuing trend. As a result, inflation this year will  average about 4 per cent – the highest rate since targeting began in 1993, and more than twice what the MPC forecasted a couple of years ago."

"Some on the MPC are understandably nervous about losing their reputations as guardians of price stability. With bond markets still relatively stable, raising rates to pre-empt such a loss of credibility might be premature. Yet whatever happens, we should remember that the MPC cannot do much about the real forces buffeting the economy. During the good times too many analysts heaped praise on monetary policymakers for trends that were beyond their control. Today the danger is the opposite: wrongly blaming them for the years of famine that have followed."

In his interview with the Telegraph, here, Mervyn King has another blast at the banks. Having not taken much notice of the banks before the financial crisis, and adopted "moral hazard" indignation at bailing them out, the governor is still seething.

Some would say he's got plenty on his own plate, given the persistent overshoot in inflation, others will see it at putting pressure on the Independent Banking Commission, chaired by the Bank's former chief economist, Sir John Vickers, not to come up with a damp squib.

A quote: “We allowed a [banking] system to build up which contained the seeds of its own destruction”, and this has still not been remedied: “We’ve not yet solved the 'too big to fail’ or, as I prefer to call it, the 'too important to fail’ problem. The concept of being too important to fail should have no place in a market economy.”

The Halifax says house prices fell by 0.9% in February (unlike the Nationwide's 0.3% rise), by 0.4% over the latest three months, and by 2.8% over the past 12 months. This is a market gently drifting lower, though there was a hint in the latest mortgage approval numbers of a pick-up in activity.

Martin Ellis of Halifax said: Martin Ellis, housing economist, said:
"House prices, as measured by the underlying trend, continue to fall slightly with prices in the three months to February 0.4% lower than in the previous three months. There has, however, been little change in house prices over the first two months of 2011 as a whole. February's monthly decline of 0.9% offset January's 0.8% gain.

"Overall, we expect a modest 2% decrease in house prices in 2011. Uncertainty over the economic outlook is likely to weigh down on housing demand this year. Fewer properties have been coming onto the market in recent months. This trend, if sustained, should improve the balance between demand and supply and help to prevent a more significant fall in house prices." More details here.

There's no doubt what is driving the economy at the moment, and it is not the service sector. The purchasing managers' index for the sector dipped from 54.5 in January to 52.6 in February. That's growth but, as Paul Smith of Markit points out, not very rapid growth.

"February saw growth of the UK service sector return to the modest rates seen prior to the weather related readings of December and January, leaving it on course to deliver around 0.3% q/q growth for Q1," he noted". Even with strength in manufacturing and the upside surprise to February construction data, the economy looks likely to deliver a rate of expansion that only offsets the decline in Q4 2010 to leave the underlying trend in GDP ‘flattish’.

“Although there were some positive elements from the forward-looking indicators from the survey – new business is rising at a solid clip and confidence reached a nine-month high – net employment continued to fall. With activity not rising sufficiently to generate jobs growth, there remains concern that the private sector as a whole will struggle to offset public sector employment cuts."

Not for the first time, it is a pity we don't have a bigger manufacturing sector.

After years in the doghouse, Britain's manufacturing sector is doing well, on the back of global economic revival and a competitive pound (a pity about our demand for imports). The latest composite purchasing managers' index, 61.5 (the same as in January) is consistent with manufacturing growth of 10% a year, according to Goldman Sachs. The eurozone manufacturing PMI was also strong, at 59.0.

This was the take of Markit, which produces the numbers:

"The UK manufacturing sector continued its strong start to the year in February. Rates of growth in output and new orders were only slightly less marked than January’s sixteen-and-a-half year peaks, leading to a further series record increase in employment. Manufacturers also benefited from stronger inflows of new export business. Cost inflationary pressures continued to build, however, as input prices rose at a near record high rate."

The housing market is pretty flat, though it is the nature of these things that small house price rises get ignored while small falls are regarded as harbingers of a new crash.

The Nationwide said prices edged up by 0.3% in February and were 0.1% lower than a year earlier. There was a similar flat message from the Land Registry on Monday. More details of the Nationwide figures here.

The Office for National Statistics had an opportunity to produce a more realistic set of gross domestic product figures for the final quarter of 2010 and, in typical ONS fashion, gave us something even more unrealistic than its first estimate.

Is it plausible that, after growing since the final quarter of 2009, and particularly well in the second and third quarters of 2010, the economy shrank by 0.1% - taking out the weather effect - in the fourth? In circumstances like this you look for explanations.

Was it the tightening of fiscal policy? No, apparently government spending provided the only support for the expenditure-based measure of GDP in the fourth quarter. Was it monetary policy? No, at the time there was no hint that the monetary policy committee was starting to move towards a rate hike.

So the ONS is telling an implausible story. As I wrote after the first estimate, a plausible picture is that growth slowed to an underlying 0.5% in the fourth quarter and was knocked back to minus 0.5% (now minus 0.6%) by the weather.

Details of the GDP figures are here. Also worth looking at the monthly service sector data, which showed a 1.3% fall between November and December. On the basis of 2009's experience, also before a VAT hike, service sector output rose between November and December. Details here.

Mervyn King last week dismissed a small rise in rates for credibility reasons as a "futile gesture". Three members of the Bank of England's monetary policy committee (MPC) disagree, inlcuding the Bank's chief economist, Spencer Dales, who joined Martin Weale and Andrew Sentance in voting for a rate hike.

Sentance upped the ante by voting for a half-point rise, while Weale and Dale wanted a quarter. Adam Posen continued to favour more quantitative easing, so a four-way split. The minutes are here.

When you are borrowing well over £100 billion a year these things are relative but there are clear signs of improvement in Britain's public finances, which will comes as a huge relief to the Treasury, and the coalition. It isn't that long since forecasters were predicting 2010-11 borrowing to be worse than 2009-10.

As it is, January saw the public finances back in the black for the first time in two years, £3.7 billion on the public sector net borrowing measure. VAT helped but other underlying revenues were also stronger. Cumulative borrowing in this fiscal year of £113 billion compares with £127.2 billion in the corresponding period of 2009-10. More here.

Most retailers would rather have a good December than a bumper January. Even so, January's 1.9% bounce in retail sales, following a downward-revised 1.4% fall in December, was better-than-expected news. Retail sales volume in January was 5.3% up on a year earlier, while sales value increased by 8.2%.

Clearly these figures aren't sustainable, representing both the weather effect - December down, January up - and pre-VAT buying. But the consumer is not dead yet. More details here.

Having been down this road myself, with my book The Age of Instability, I was interested to read the "official" American version, The Financial Crisis Inquiry Report, just published in Britain.

It agrees with me (at least the majority of commissioners do) that trying to pin the blame on successive American governments' home-ownership policies and the Community Reinvestment Act (CRA) does not wash. CRA loans only accounted for 6% of all subprime loans and were half as likely to default as the others.

Where I disagree is over Lehman Brothers. It says the failure of Lehman was only one of many events in the dark days of September 2008, I say it was the pivotal one. It says the US authorities could have done nothing to prevent Lehman failing; I say a guarantee to Barclays would have satisfied the UK regulators.

Anyway, the book is worth reading, and is available here.

Andrew Sentance is one member of the monetary policy committee who has not been deflected from his belief that a rise in interest rates is needed. We will see this week whether there are others. In his latest speech he argues that the level of sterling is not independent of monetary policy, so not outside the Bank of England's influence and control. His speech is here.

Otherwise, the CBI reported strongly rising manufacturing output and prices.

Gordon Brown could never quite bring himself to use the word "cuts" and Mervyn King appears to have a similar problem with the words "higher rates". While the Bank of England's new inflation forecast implies at least a couple of hikes this year, with Bank rate rising to 3% over the next 2-3 years, the Governor insisted he was not endorsing this view on rates.

Otherwise the inflation report was fairly unremarkable. Higher inflation and weaker growth this year but things get much better in 2012 and beyond. The report is here.

Earlier, labour market statistics pointed to steady Labour Force Survey unemployment, at 2.49m, though weak employment growth and a modest January rise in the claimant count. Given the winter dangers, these figures were not too bad. Details here.

Inflation at 4% (consumer prices index) was at least no worse than expected, though up from 3.7% in December and likely to remain elevated for all of this year. RPI inflation, at 5.1%, was up from 4.7%, and underlines the squeeze on real take-home pay. RPIX inflation, the old target, was also 5.1%, up from 4.7%.

Not much comfort in these numbers. Looking at core measures, CPIY, excluding indirect taxes, was 2.4%. CPI inflation excluding food, energy, alcohol and tobacco was 3%. More here.

In his letter to the chancellor, required every three months if inflation is more than 1% above the official 2% target, Mervyn King said inflation would probably be below the target were it not for VAT, higher energy prices and the pass-through effects from sterling's devaluation in late 2007 and 2008.

However, his confidence that inflation will return to target in two or three years time seems less than it was and he does not attempt to conceal differences on the MPC. This suggests the committee is more split than in November, when only Andrew Sentance was voting for a rate hike. His letter is here.

The White House has published its budget proposals, which are for a $3.7 trillion budget (spending) and a $1.6 trillion budget deficit this year, 10.9% of GDP. Growth is assumed to reduce this to 7% of GDP next year but deficit-reduction measures do not kick in until 2013, and then in fairly mild form. This is a true Transatlantic contrast. These tables, while not the easiest to read, are interesting.

Consumer price inflation is unlikely to have jumped as much in January as the rise in output price inflation from 4.1% to 4.8% reported by the Office for Natonal Statistics. Even so, the figures were a reminder that things are going to get worse before they get better as far as inflation is concerned. "Core" output price inflation rose from 2.6% to 3.2%, mainly reflecting the increase in VAT.

Input price inflation, up from 12.9% to 13.4%, confirmed that even though pay growth is subdued, industry is facing cost pressures. More details here.

It would have been a surprise if the Bank of England had hiked interest rates, though not a shock. The monetary policy committee held Bank rate at 0.5% and kept quantitative easing at the existing £200 billion. Some will see the Bank as brave for resisting pressure for higher rates while the economy is still fragile. Others will say the Bank ducked starting the process of normalising rates in the face of high inflation.

The Bank will have known next week's inflation figures and will publish its February inflation report on Wednesday. Don't forget that its forecasts will be conditional on the path of market interest rates, which imply a gradual rise. In two weeks time we will get the minutes. Did anybody join Andrew Sentance and Martin Weale in voting for a hike. Maybe. But we'll see.

Earlier, official figures showed manuafcturing output slipped by 0.1% in December, while overall industrial production, boosted by energy, rose by 0.5%. The 12-month increases were 4.4% and 3.6% respectively. More on what appear to be another set of snow-affected figures here.

Those of us hoping for the promised export-led recovery are having to be very patient. Yes, exports are growing well but so are imports and, indeed, import prices. So far we are seeing the downside of a weak pound in rising inflation but not much of an upside.

Economic theory would point to the J-curve effect - initially the trade numbers worsen, then they improve. That should happen, but it is taking time. In the meantime we have to live with December's record £4.8 billion goods and services deficit, up from £3.9 billion in November. More details here.

Is it economics or politics? George Osborne has announced that he is raising the amount of this year's banking levy from £1.7 billion to £2.5 billion. The banks will be charged more from March 1 (a 0.1% levy), compared with 0.05% for both January and February, before the rate reverts to 0.075% in April.

The official explanation is that the banks are stronger and able to take it, and that the announcement could not be delayed until the budget. Part of it, however, must reflect Labour criticism that the coalition is letting the banks off too lightly. The Treasury announcement is here.

PS: For those who are interested, I am now tweeting on @dsmitheconomics. You can read the tweets on the left-hand side of the page, or on twitter.com.

The Halifax unexpectedly announced a 0.8% rise in house prices for January, for a 2.4% annual drop. Prices in the latest three months were down by 0.7% on the previous three. The figures do not change the picture of a pretty stagnant market.

According to Halifax's Martin Ellis: "We expect limited movement in house prices overall this year. There are, however, likely to be some monthly fluctuations with the risks on the downside. The prospects for the market in 2011 are closely aligned with the performance of the wider economy. Consumer confidence has fallen recently, partly as a result of nervousness about the economic outlook." More here.

Meanwhile, new car registrations were down by 11.5% in January, John Lewis said department store sales in the final week of January were marginally down on a year earlier but individual insolvencies and company liquidations fell in the final quarter of 2010. What they call a mixed picture.

After good results from both the manufacturing and construction purchasing managers' surveys, the service sector purchasing managers’ index completed the story, rebounding from 49.7 in December to 54.5 in January. This was an eight-month high for the sector.

Markit, which prepares the data for the Chartered Institute of Purchasing and Supply, is cautious about reading too much into the data, which is says are consistent with quarterly growth of about 0.4%. Even so, it is a lot better than minus 0.5%.

The purchasing managers' index for manufacturing is a welcome antidote to recent gloom, rising to a record 62 from an upward-revised 58.7 in December. Though there are also inflationary pressures affecting the sector (input costs rising at a record high), this suggests industry is firing on all cylinders, with new orders and employment also rising at record rates.

In contrast, the Nationwide said house prices slipped by 0.1% in January, and were 1.1% lower than a year earlier.

The latest GfK-NOP consumer confidence survey is pretty bleak, with the overall confidence measure slumping from minus 21 in December to minus 29 in January. According to Nick Moon of GfK-NOP:

"January’s eight point drop represents an astonishing collapse in consumer confidence. In the 35 years since the Index began, confidence has only slumped this much on six occasions, the last being in the midst of the 1992 recession.

"The VAT increase is the first of the government’s austerity measures that has had a widespread impact on consumers, and it seems to have hit people's economic confidence hard, especially as the biggest drop was in consumers' appetite for major purchases. With inflation on the up and the full force of the cuts yet to hit, these figures could be the beginning of a very painful period."

The question is whether this makes consumers stop spending. Yesterday's CBI distributive trades survey showed a drop in the balance of retailers reporting higher sales than a year earlier but not a collapse. A balance of 37% of retailers reported high sales than a year earlier, down from 56% in December but still pretty strong.

Yes, according to this paper, co-authored by David Miles of the Bank of England's monetary policy committee. It argues that the banks need much more equity capital than in recent years and compared with the new Basel III framework. The paper is here.

The big news from the minutes of the Bank of England's monetary policy committee meeting was that Martin Weale joined Andrew Sentance in voting for a hike in Bank rate. Whether he would have done so knowing the fourth quarter GDP numbers (his old National Institute methodology pointed to a 0.5% rise not fall in GDP) is another matter.

Adam Posen, meanwhile, may be feeling a little more comfortable with his call for further quantitative easing, as will the majority on the MPC, which sat on its hands. However, even for them, the decision was a closer one:

"For most members, recent developments implied that the risks to inflation in the medium term had probably shifted upwards. For some of those members, the decision this month was finely balanced. The analysis that fed into the forthcoming February Inflation Report projections would provide an opportunity to assess fully the developments since the previous Report, and to evaluate
more thoroughly the risks to inflation in the medium term. The publication of the Report would also give the Committee the opportunity to explain fully its assessment of the outlook and its policy decisions."

As I say, the question is whether the GDP numbers changed all that. The minutes are here.

An interesting speech by Mervyn King, as always. The message, delivered in Newcastle, was that higher interest rates would not have prevented higher inflation, which is not domestically generated, but would have caused more economic pain.

This is the key passage, after he describes the exchange rate, higher energy prices and tax hikes as the three factors that have given above target inflation, averaging 3% over the past four years:

"Taken together, those three factors by themselves would account for a remarkable 12% addition to the price level over four years, or an average increase in the inflation rate of 3 percentage points a year. Since the consumer price index as a whole rose by not much more, the contribution of domestically generated inflation over that period was close to zero, and obviously well below the target.

"It has always been understood that supply shocks – shocks such as these that move output and inflation in opposite directions – pose a dilemma for monetary policy. Should inflation be brought back to target quickly, reducing the risk of a rise in inflation expectations, or more slowly, reducing the impact of the shock on output? Let me quote what I said in 1997 about how the MPC would resolve that dilemma:

"Many supply shocks are price level effects. For example, changes in indirect taxes or commodity prices often affect the domestic price level but do not in themselves change the underlying rate of inflation. An appropriate monetary response is to accommodate the first round price level effects, while ensuring that changes in the published twelve-month inflation rate do not alter inflation expectations and lead to second round inflationary changes in wages and prices. … Since shocks may take several months to have their full effect, a horizon of about two years is a reasonable one over which to try to bring inflation back to its target. But if shocks are sufficiently large – in either direction – then it may be sensible to extend the horizon over which inflation returns to its target level."

Fine, but isn't the exchange rate the transmission mechanism for monetary policy, at least in part, and thus influenced by the stance of policy? The speech is here.

The Office for National Statistics has done it again. After two quarters in which gross domestic product surprised on the upside, the fourth quarter numbers shocked spectacularly on the downside. The gloomiest forecasters predicted only a tiny rise in GDP. As it was, it fell by 0.5%. The 12-month rate of increase slumped to 1.7%.

There are just over 90 days in a quarter. Take out one of them because of bad weather and GDP falls by 1% or so. That, it has to be hoped, is what happened, or something like it - GDP would have risen by 0.5% but weather knocked it back to minus 0.5%. The ONS's current view, that GDP was flat setting aside weather effects, is almost too gloomy to contemplate ahead of this year's fiscal tightening.

These figures have radically changed the picture for 2010, growth for which is now put at just 1.4%, and will have unnerved the government just days after Ed Balls's arrival as shadow chancellor. After Q4 falls of 0.5% in service sector output and a 3.3% drop in construction there should be a decent bounce in the first quarter of 2011 but nothing is guaranteed. More here.

The news on the public finances was a bit better, despite an apparent explosion in debt from taking RBS and Lloyds fully onto the public sector balance sheet. December's borrowing of £16.8 billion was about £3 billion less than feared. Cumulative borrowing in 2010-11 of £118.4 billion is down from £126.8 billion last year. More here.

Retail sales fell by 0.8% between November and December, with food stores down 0.9% and non-food 0.6% weaker. December was supposed to be the month when shoppers bought ahead of the January VAT increase but the coldest December for 100 years - which the Office for National Statistics is blaming for part of the weakness - appears to have put paid to that.

Year-on-year, retail sales volume in December was unchanged on December 2009. Interestingly, the weakness was concentrated in food, down 3.4%, rather than non-food, up 3.1%. Sales value showed a 2% year-on-year rise. Things may become a little clearer in a month or two. More here.

Given the December snows and signs of a softening of activity at the end of last year the labour market numbers could have been bad. So they come as something of a relief. The claimant count dropped by 4,100, its third successive monthly fall, to stand at 1.46m.

Though the Labour Force Survey measure of unemployment rose by 49,000 over the September-November period to 2.498m, 7.9% of the workforce, the total was fractionally lower than reported a month ago for the August-October period, which is consistent with an unemployment fall in November.

Of course a release like this is also contains a lot of bad news. Average earnings growth of 2.1%, while good news for the Bank of England, underlines the squeeze on real incomes. Retail price inflation is running at 4.8%.

And there are these: "The number of employees and self-employed people who were working part-time because they could not find a full-time job increased by 26,000 on the quarter to reach 1.16 million, the highest figure since comparable records began in 1992.

"The unemployment rate for those aged from 16 to 24 increased by 1.0 on the quarter to reach 20.3 per cent, the highest figure since comparable records began in 1992.

"The number of people who were economically inactive because they had taken retirement before reaching the age of sixty-five increased by 39,000 on the quarter to reach 1.56 million, the highest figure since comparable records began in 1993."

More here.

Consumer price inflation rose more than expected last month, rising to 3.7% (from 3.3% in November) against the expected 3.4%. RPI inflation rose by less, but was nevertheless up from 4.7% to 4.8%. Inflation was boosted by higher energy and food prices, together with air fares. December's food price rise was the biggest on record, while the rise in petrol prices represented the biggest since 1996.

The markets are convinced that inflation will climb above 4% in January and remain around 4% for most of the year. The only thing that could stop it is if the VAT increases have already been priced in by retailers. There's some evidence of that but probably not enough to prevent 4% - double the Bank of England's target. Even CPIY, excluding indirect taxes, which I mentioned on Sunday, rose from 1.6% to 2%.

What will persuade the Bank to hike interest rates? It will have known of these figures last Thursday when it held rates steady. If it continues to hold in February, when it will have new, higher inflation projections, the inference will be that the monetary policy committee is prepared to look through this period of high inflation for some time to come. More on the numbers here.

Why is a fair fuel stabiliser, a Conservative policy before the election and now back in the news, not a good idea? Because, according to the Office for Budget Responsibility, it is a myth to say that the government gains from a temporary (or permanent) rise in oil prices. Thus, there is nothing to offset through lower excise duties. The government could cut such duties but it would need offsetting tax increases elsewhere. Its press release from August is here.

On Wednesday I gave the Boustead annual globalisation lecture at Nottingham University's graduate teaching centre in Kuala Lumpur, Malaysia. The lecture, under the auspices of the university's Globalisation and Economic Policy Centre, was under the title Shifting Sands: The Global Financial Crisis and the Changing Balance of the World Economy. The essential message was that the crisis and its aftermath has had the effect of accelerating the shift to Asia. The presentation slides can be accessed here.

The latest producer price numbers confirm that inflation is going to get worse before it gets better. Output prices rose by 0.5% in December, for a 12-month increase of 4.2%. Input prices jumped by 3.4% in December for an annual 12.5% rise. Not comfortable for the Bank of England. Details here.

The National Institute's "flash" estimates of gross domestic product are not always spot-on but its guesses are a good as anybody's. It thinks the economy grew by 0.5% in the final quarter of 2010 which, while slower than the two previous quarters, would be a decent outcome.

The estimate was on the back of industrial production figures for November, which showed an overall rise of 0.4% and a bigger increase of 0.6% for manufacturing, in line with the recent pattern. Over the latest 12 months, industrial production has grown by 3.3%, manufacturing by an impressive 5.6%. More here.

Despite some nervousness around the Bank of England monetary policy committee's first meeting of the year, the outcome was, as expected, an unchanged 0.5% Bank rate.

Britain's overall trade deficit widened marginally to £4,1 billion in November, from an upward-revised £4 billion in October. Exports are rising at a reasonable pace but so are imports. The EU deficit widened from £3.5 billion to £3.7 billion. Overall though the trade deficit has been flat this year. More here.

House prices ended 2010 on a weak note, according to the Halifax (part of Lloyds Banking Group), with prices down 1.3% in December, for a fall of 0.9% in the final quarter and 1.6% (on a three-monthly basis) on a year earlier. There's some pretty strange analysis around in the run-up to the Bank of England's monetary policy committee meeting this week. One clear fact is that the housing market remains very soggy.

This is Martin Ellis, the Halifax's chief economist:

"Prices in the final three months of 2010 were 0.9% lower than in the previous quarter. This rate of decline is significantly less than the quarterly falls of 5-6% during the second half of 2008. House prices fell by 1.3% between November and December.

"Looking forward, we expect limited movement in house prices during 2011 but with the risks on the downside. Interest rates are likely to remain very low for some time. This will continue to support a favourable affordability position for those entering the market and limit financial pressure on existing homeowners to sell. Current signs that homeowners are becoming more reluctant to sell would, if continued, help reverse the imbalance between buyers and sellers. Nonetheless, uncertainty about the economy, weak earnings growth and higher taxes could put some downward pressure on demand."

I don't make a habit of hanging around churchyards in winter but on a recent trip to Bath I saw the memorial stone to Thomas Malthus in the Abbey. In Edinburgh for Hogmanay, a short detour to the Canongate Kirk brought me to the gravestone of Adam Smith (above). It could be a new form of tourism, visiting the burial places of the great economists.

The service sector purchasing managers' index matched its construction counterpart, by dropping sharply in December, in its case from 53 to 49.7. Since index levels below 50 are consistent with falling output, this suggests that service sector activity declined, for the first time since April 2009. Markit, which produces the data, estimates that gross domestic product rose by 0.4% in the fourth quarter of 2010, sharply down on the 0.7% expansion in the third quarter and the 1.1% growth of the second.

Meanwhile, the Bank of England's credit conditions survey pointed to relatively flat credit availability in the latest three months, although with some evidence of improved availability in the first quarter of 2011. One striking feature is the drop in mortgage demand in the latest three months, which lenders expect to persist. The survey is here.

Next has reported that the December snows impacted on its Christmas trading, with an estimated £22m in lost sales and like-for-like sales in the five months to December 24 down 6.1% on a year earlier.

Snow was also a factor in the drop in the Markit/CIPS construction sector purchasing managers' index, which fell from 51.8 in November to 49.1 in December. Employment fell very sharply, though the industry was relatively upbeat about prospects. We will see a lot more of this in the coming days and weeks, making it harder to read what's happening to the economy.

On the day VAT went up to 20%, contributing to sky-high petrol and diesel prices, a bit of good news was needed. It was duly provided by the purchasing managers' index for manufacturing in December, which rose from 57.5 to a new 16-year high of 58.3. Output and orders rose at their strongest rate since May and employment growth was similar to November's record high. There was a reminder, however, of inflationary pressures, with industry's input costs also rising at a record pace. The Markit survey can be accessed here.

Also released, Bank of England lending data, including lending to individuals. Mortgage approvals ticked up to 48,019 in November, from 47,315 in October, suggesting there is a bit of life in the housing market yet. More here.

Nothing better illustrates the turnaround in the housing market than the numbers for housing equity withdrawal. Before the crisis, large sums were withdrawn from the housing market in the form of housing equity withdrawal, peaking at nearly £14 billion a quarter.

Though most of this was saved, it also contributed to spending. Since the second quarter of 2008 nearly £50 billion has been injected into the housing market as equity withdrawal has gone into reverse. At £6.1 billion in the latest quarter, 2.4% of post-tax income, there is no sign of the process slowing. More here.

The latest Office for National Statistics' take on gross domestic product saw a downward revision of growth in the second quarter, from 1.2% to 1.1%, as expected (in fact slightly less had been expected), but also the latest quarter from 0.8% to 0.7%, and the first quarter of the year from 0.4% to 0.3%.

There are swings and roundabouts, as always, with two quarters of 2009, the first and the fourth, being revised higher by 0.1 percentage points. But growth over the latest 12 months has been revised down from 2.8% to a still-respectable 2.7%. Growth for calendar 2010 as a whole looks like being between 1.6% and 1.7%.

Revisions were expected on the back of the new construction data but these were a wide-ranging set of revisions. Net trade no longer contributed to growth in the third quarter but business investment did. More here.

The current account deficit widened to £9.6 billion in the third quarter from a downward-revised £5.2 billion in the second suggesting an overall 2010 deficit of about £32 billion. Details here.

Finally, the Bank of England's monetary policy committee voted 7-1-1 in favour of holding Bank rate at 0.5% and kept the amount of quantitative easing at £200 billion. Adam Posen wanted more QE, while Andrew Sentance wanted a rate hike. The majority, however, appears to be getting slightly more concerned about inflation, saying the medium-term risk had moved upwards. The minutes are here.

Whichever way you look at them, the November public borrowing numbers were disappointing, with a record borrowing total - for any month - of £23.3 billion.

We think we've been living with the cuts since May but these figures suggest the government has yet to get to grips with spending. It is early days, with the cuts not scheduled to begin in earnest until April, but this will need watching. The January VAT hike should ensure this year's borrowing will be below 2009/10. It may not, however, be by much.

More details: "In November 2010, there was net borrowing (excluding financial interventions) of £23.3 billion, which compares with borrowing of £17.4 billion in November 2009.

"Public sector net borrowing (excluding financial interventions) was £104.4 billion in the year to date for 2010/11, down from £105.1 billion in the same period last year. The OBR’s Economic and Fiscal Outlook (November 2010) forecast for 2010/11 is net borrowing of £149 billion.

"The current budget (excluding financial interventions) showed a deficit of £19.9 billion in November 2010, compared with a deficit of £14.0 billion in November 2009." The official release is here.

The Bank of England, famously, did not pay enough attention to its own twice-yearly Financial Stability Report ahead of the crisis. There's no danger of that happening again, is there? In its latest report, the Bank is worried about eurozone contagion affecting Britain and about the return of the "search for yield" that proved so damaging.

This is a summary: "Since June sovereign and banking system concerns have re-emerged in parts of Europe. The IMF and European authorities proposed a substantial package of support for Ireland. But market concerns spilled over to several other European countries. At the time of writing, contagion to the largest European banking systems has been limited.

"In this environment, it is important that resilience among UK banks has improved over the past year, including progress on refinancing debt and on raising capital buffers. But the United Kingdom is only partially insulated given the interconnectedness of European financial systems and the importance of their stability to global capital markets.

"The Report also says that more medium-term risks are posed by a redistribution of capital within the financial system. Capital has flowed into safe assets and, despite recent increases, bond yields remain low in many advanced economies. There are some signs of this intensifying a search for yield, including into emerging market assets.

"Low yields may also be masking latent distress among some overextended borrowers, including some households, corporates and sovereigns. Against that backdrop, it is in banks’ collective interest to build resilience gradually through retention of earnings, which would be boosted if banks restrain distribution of profits to equity holders and staff."

The report is here.

Retail sales rose by 0.3% between October and November, maintaining their upward trend for the year, though the sharp drop last January means the 12-month gain was an unspectacular 1.1%. The detail on the 12-month increase was interesting: "Predominantly food stores decreased by 1.3% – this is the fifth consecutive fall, while predominantly non-food stores increased by 3.6%."

However, this pattern changed in the latest month: "Between October and November, total sales volume increased by 0.3%. Predominantly food stores increased by 0.6 per cent while predominantly non-food stores increased by 0.2%." The value of retail sales in November was 3.6% up on a year earlier.

So, reasonable momentum going into 2011, though January's VAT rise may mean we see a similar pattern to 2010, with pronounced weakness at the start of the year.

Meanwhile, the Bank of England will be concerned by a rise in inflation expectations. Its latest survey shows that people think the current rate of inflation is 3.9% and that it will stay at that level for the next 12 months. Medium-term inflation expectations are 3.3%. The Bank says it is watching these surveys like hawks. I doubt the monetary policy committee is yet hawkish enough to think about a rate hike. The survey is here.

I've said before that it would be a minor miracle if we get through the winter without some rise in unemployment and that appears to be the case. Employment fell by 33,000 in the three months to October, a drop entirely attributable to a fall in public sector employment. Unemployment rose by 35,000 to 2.5m, or 7.9% of the workforce, up 0.1 points on the quarter.

Though the claimant count dropped by 1,200 to 1.46m, the figures underline the challenge of keeping unemployment down while the public sector is shedding jobs, I think it can be done but these figures will give ammunition to the government's critics. More here, and more details below..

The unemployment rate for the three months to October 2010 was 7.9 per cent, up 0.1 on the quarter. This is the first quarterly increase in the unemployment rate since the three months to April 2010. The total number of unemployed people increased by 35,000 over the quarter to reach 2.50 million. Male unemployment increased by 11,000 on the quarter to reach 1.46 million and the number of unemployed women increased by 24,000 on the quarter to reach 1.04 million, the highest figure since the three months to May 1988. There were 839,000 people unemployed for over twelve months, the highest figure since the three months to February 1997 and up 41,000 on the quarter.

There were 158,000 redundancies in the three months to October 2010, up 15,000 on the quarter. This is the first quarterly increase in redundancies since the three months to April 2010.

The number of people claiming Jobseeker’s Allowance (the claimant count) fell by 1,200 between October and November 2010 to reach 1.46 million.

The markets were prepared for 3.2% consumer price inflation for November, so 3.3% was marginally disappointing. Retail price inflation rose to 4.7%, from 4.5%. We know that the Bank of England expects inflation to stay above 3% through 2011.

That said, there are one or two unusual features in the November data, including record October to November price increases in food and alcohol (1.6%), clothing and footwear (2%) and furniture and household goods (1.6%). That to me looks like retailers preparing the ground for sale discounts, which will look more generous from a higher base. Nothing to worry about in these figures that we did not know before. Details here.

The speech by Bank of England deputy governor Charlie Bean on the outlook for 2011 and beyond provides a generally conventional Bank view, as you would expect. Inflation will come down after VAT and other distortions have worked through, but we're watching inflation expectations like hawks.

The global and UK recoveries (nearly 5% and 2.8% respectively) have been pretty good but there is a question about whether UK households have grasped the extent of the fiscal tightening that lies ahead and whether the banking system will be strong enough to support a business investment recovery.

A couple of interesting snippets. Emerging economies may be justified in erecting temporary capital controls against financial flows from advances economies (the search for yield again) and UK banks should be strong enough to withstand direct losses from Ireland, Greece, Portugal and Spain. Even then, the indirect effects could get us. The speech, worth reading, is here.

House prices appaer to be ending the year flat, with the Halifax reporting just a 0.1% fall in prices in November. The latest LSL-Acadametrics house price index showed a rise of 0.2%, with an 12-month gain of 5.9%. Prices have, however, done little over the past seven months. Transactions, meanwhile, weakened further.

According to Dr Peter Williams, chairman of Academetrics: "Overall, 2010 has seen a flat market but one with some significant regional and local variations of which buyers and sellers need to be aware. Going forward, we expect to see a similar pattern in 2011.

“On average, over the last fifteen years, the number of homes sold in November each year has decreased by 2.7% from October levels in the same years. Our estimates suggest that November 2010 transactions will show a greater than average fall of 4.6% from the previous month, with 58,500 units being sold. This level of sales comprises 63% of the long term fifteen year average of 93,500 homes November sales. For the second month in succession this year, the number of homes sold during the month is lower than the equivalent period in 2009.”

Bank rate has been on hold for so long now that we no longer expect any change. Not since March 2009 have rates been moved, and it is a safe bet that we will get to the second anniversary of that without any change. Quantitative easing has also been maintained at the exisiting £200 billion. As things stand, it is hard to see what might provoke the Bank into action in either direction.

Meanwhile, the latest trade figures look superficially disappointing, with the overall goods and services deficit widening from £3.8 billion in September to £3.9 billion in October. However, the September deficit was originally published as £4.6 billion, so not too much to worry about. More here.

One or two people have contacted me to say they cannot access the site from their office computers. If that's the case, e-mail me with your IP address - use whatismyip.com - and it can be fixed. The e-mail address is on the left.

The latest official figures for manufacturing chimed in with the surveys, with output up by 0.6% in October and by 5.8% on a year earlier. Overall industrial production was less strong, down 0.2% on the month and up by only 3.3% on the year. That looks like a bit of an aberration. More details here.

Updated content will appear later today.

The Markit November purchasing managers' survey for manufacturing is one of the most encouraging bits of economic news for a long time. The index rose to 58 in November from an upward-revised 55.4 (originally 54.9) in October. The index has been above the key 50 level - which indicates expansion - for 16 months in a row, is at its highest since September 1994 and has employment intentions at their highest since the survey began in 1992. Genuinely good news.

Meanwhile, the other part of the rebalancing picture was a 0.3% drop in house prices in November, according to the Nationwide Building Society, with prices no higher ( up by just 0.4% to be exact) on a year earlier. More on that here.

There's plenty in the Office for Budget Responsibility's updated forecast for the economy, but the headlines are these: Growth is revised higher for this year (up from 1.2% to 1.8%) but slightly lower for subsequent years. 2011 will see growth of 2.1% (down from 2.3%), while 2012 is trimmed from 2.8% to 2.6%. The OBR expects the economy's weakest spot to be in the first quarter of 2011, when growth slows to 0.3%. No double-dip, just a slowdown.

The OBR has revised down projected job losses by more than expected, from 490,000 to 330,000. This is the relevant paragraph:

"With the Government deciding in the Spending Review to reduce somewhat its planned cuts in public services spending, by announcing additional cuts in welfare spending, we expect general government employment to fall by 330,000 over the next four years, compared to the 490,000 predicted by the interim OBR in June. We estimate that the Government’s plans to freeze real total public spending in 2015–16 imply a further 80,000 fall in that year, in the absence of further cuts in welfare or other annually managed spending."

Overall, a forecast of growth led by business investment and net exports. While the OBR says the recovery will be slower than after the recessions of the 1970s, 1980s and 1990s (it has been stronger so far), this is still a promising outlook. There's plenty of detail in the report, available here.

Following Adam Posen's public disagreement with Mervyn King over the governor's support for the coalition's budget cuts - and his criticism of Labour's plans for being insufficient - the question was who were the other members of the monetary policy committee (MPC) who were also unhappy. We now know that Kate Barker, on the MPC at the time of the May election, shared Posen's disquiet. The question is whether there are any others. Posen suggested there were.

There's austerity and austerity, and if the Irish economy can grow through the latest austerity announcements it is a very resilient animal indeed. Normally I'd applaud a cut in the minimum wage (down by a euro to 7.65 euros an hour) as a way of pricing people into jobs. The demand impact may, however, fully counteract any such benefit.

Taxes are going up, with VAT heading for 23% from 21% over the next four years, there's a new property tax and thousands of public sector jobs are being cut. Mervyn King was once reported to have said that the party that implemented the necessary tough measures in Britain would be out of power for a generation. Such is the anger in Ireland, that could be the fate of Fianna Fail. More details here of the National "Recovery" Plan

Gross domestic product rose by an unrevised 0.8% in the third quarter, for a rise of 2.8% on a year earlier. The second quarter GDP rise of 1.2% is vulnerable to a downward revision, though that was not a task for the Office for National Statistics on this occasion.

The best news in this release was that it showed growth is becoming better balanced. So the 0.8% rise in GDP in the third quarter came in spite of just a 0.3% increase in household spending and a 0.4% rise in government expenditure. Exports rose by 2.2%, imports by only 0.7%, so net trade was an important contributor to growth. More here.

Also published, the latest index of services, which showed a rise of 0.6% between August and September. The importance of that is that this very important sector of the economy had decent momentum going into the fourth quarter. Even if service sector output were to remain at September levels, it would show a 0.6% rise between the third and fourth quarters. The release is here.

Markets have had a bad press in the past three years, particularly when you put the word "efficient" in front of them. The markets, however, are a useful check on the state of sentiment and the extent of the risks.

This morning we awoke to news of renewed, and potentially serious tensions betweem South and North Korea, with a military attack by the latter on one of the former's islands. The newspapers are full of impending eurozone disaster, following Ireland's bailout and the political fallout from it, which will mean an early election and could threaten the country's austerity plan. The coalition is breaking up, which might send a few shudders this side of the Irish Sea.

But the markets are surprisingly clam. The euro hasn't collapsed and neither have stock markets. It may be the lull before the storm, or it may be that markets are underestimating the risks. Still, any port ...

Update: Markets got a little less calm as the day progressed, the FTSE 100 ending a fraction under 100 points lower.

As for hard numbers, there's a hint in tbe latest British Bankers' Association statistics that mortgage and business lending is stabilising, and that the underlying picture for the latter may be marginally stronger once you take into account repayments of loans by larger companies. That, of course, is the story the BBA wants to tell. More here.

There are bigger issues in the rescue of Ireland than the vulnerability of UK exports to a further downturn in the Irish economy. Still, it is a puzzle. The Irish Republic, as everybody from the prime minister down keeps reminding us, is a more important UK export destination than the BRICs' economies - Brazil, Russia, India and China - combined.

Let's dig into that a bit. Last year UK exports to Ireland were £15.9 billion, imports £12.5 billion, a rare UK bilateral surplus of £3.4 billion. However, UK exports fell sharply between 2008 and 2009, from £19.1 billion, a drop of nearly 17%, so they have already taken a substantial fall.

More importantly, though it is hard to be precise, the nature of UK exports to Ireland is different to those to countries further afield. Some of it reflects border area trade. Some of it may also reflect trade that happens to come through the UK, and in particular Northern Ireland, but which originates elsewhere in Europe. The trade effect is less important than financial and banking effects.

Despite a 0.5% rise in October, Britain's high streets are not having a great time. Sales volume in October was 0.1% down on October 2009. There's been no growth in sales volume over the past year. This is contrast to the period when the economy was in recession. In October 2009, for example, sales volume was 3.3% up on a year earlier.

The picture on value, arguably more important to retailers, is different, though not that much. Sales value was 2% up on a year earlier in October 2010. A year earlier value growth was 2.6%. It is a picture which suggests retailers will struggle for pricing power, which should push down on inflation. More here.

Meanwhile, the improvement in the public finances looks to have stalled. October's net borrowing of £10.3 billion was marginally higher than the £10.1 billion of October 2009. More on that here.

Both measures of unemployment fell in the latest figures, the Labour Force Survey measure by 9,000 to 2.45m in the July-September period (pushing the unemployment rate down by 0.1 points to 7.7%). The claimant count dropped by 3,700 to 1.47m, or 4.5% of the workforce. The fall followed a couple of tiny monthly rises. Average earnings growth, including bonuses, edged up to 2% from 1.7%.

The 16-64 employment rate for the three months to September was 70.8%, up 0.3 points on the quarter. The number of people in employment aged 16 and over increased by 167,000 on the quarter to reach 29.19m. Employment is up 286,000 on the year but 210,000 lower than two years previously.

In truth, these figures are representative of a fairly flat labour market. Employment is growing but the rise is concentrated in part-time jobs and self-employment. Unemployment is not moving strongly in either direction. Still, it could have been a lot worse. More details here.

The Bank of England's minutes were also published, showing a 7-1-1 split, as expected. The minutes are here.

The October inflation data came in close to expectations, with consumer price inflation remaining in the "letter-writing" range at 3.2%, up from 3.1%, and retail price inflation at 4.5%, down a whisker from 4.5%. We know from the inflation report what Mervyn King will say in response, in his letter to George Osborne.

Though the latest monthly numbers were boosted by higher petrol and diesel prices (though helped by lower food prices) inflation looks pretty well locked in at just over 3%, ahead of the January VAT hike. The Bank may take some comfort from the fact that CPI inflation excluding indirect tax changes is 1.6%, and just 1.4% at constant tax rates. More here.

One member of the Bank of England's monetary policy committee, Andrew Sentance, has a clear idea. He believes the recovery will continue to exceed expectations, that there is limited spare capacity in the economy and that, in consequence, inflation will stay uncomfortably high. He wants higher interest rates.

Another, Adam Posen, believes that the recovery will be weak, with the economy flirting with stagnation and deflation. He wants more quantitative easing, though done in a different way than before.

The uncertainty that characterises the Bank's November inflation report must therefore refer to the other seven members. Their view was summed up by Mervyn King:

"In the past year, our economy has begun to recover and GDP growth has been above its long run average. But whether that recovery will be sustained depends heavily on developments in the rest of the world, as domestic spending, especially by the public sector, is likely to grow more slowly looking ahead. And given the scale of the fall during the recession, the level of output is likely to remain weak."

As for inflation: "Given the quantitative importance of the different influences buffeting the economy at present, it is hard to judge how inflation will evolve in the medium term, and there are sizeable risks in both directions. On the one hand, slack in the economy is likely to reduce inflationary pressure ... On the other hand, inflation has been above the target for much of the past three years. It is possible that additional import price pass-through or commodity price
rises will push up further on inflation. And if the period of above-target outturns causes medium-term expectations to drift up, then the inflation outlook could be significantly higher."

Though its forecasts have not changed greatly since August, it is possible to detect, not just an increase in short-term inflation prospects but also rather less certainty that inflation will come down. The Bank majority is still firmly in "no change" mode but the weather vane has moved fractionally towards Sentance's view. The inflation report is here.

Manufacturing output edged up by a mere 0.1% in September though industrial production overall rose by 0.4%. The year on year growth rates were 4.8% and 3.8% respectively. Growth over the quarter was in line with the GDP numbers, so do not suggest any need for revisions. More details here.

There was a marginal improvement in Britain's trade position, with the goods and services deficit narrowing from £4.9 billion to £4.6 billion in September and the deficit on goods slipping from £8.5 billion to £8.2 billion. Any celebration has to be tempered by the fact that both deficits for August were revised up by £0.3 billion. More here.

Despite the green light provided by the Federal Reserve's announcement of a further $600 billion of quantitative easing, it would have been a big surprise if the Bank of England had followed suit after recent strong data. Sure enough, Bank rate was left unchanged at 0.5% and the existing £200 billion of QE maintained. More will be revealed with next week's inflation report.

Earlier, the Halifax announced an expectations-beating 1.8% rise in house prices in October, following an even bigger September fall. Behind the big swings is a gentle softening of prices.

The pick-up in the service sector purchasing managers' index from 52.8 in September to 53.2 in October followed a rise in the manufacturing PMI earlier in the week. Though the construction index fell, the fact that two out of three of these indexes rose suggests the fourth quarter has got off to a reasonable start.

Though not all components of the service sector index were strong - the employment component remained below the crucial 50 level - the overall index beat market expectations, as did the manufacturing PMI.

I'm on holiday so not many updates this week but the third quarter gross domestic product figures were too good to resist.

When everybody was readying themselves for slowdown and double-dip stories, the 0.8% rise in GDP in the third quarter was a welcome reminder of the economy's resilience in the face of what is already a significant fiscal tightening this year.

It would be extraordinary if, after this number - accurately predicted by Royal Bank of Scotland but not most economists - the Bank of England even contemplated further quantitative easing at its November meeting.

Though the numbers were boosted by exceptionally strong construction output, up 4%, there was across-the board strength in the economy. It was the best two-quarter performance since 2000. According to the Office for National Statistics, growth in the second and third quarters was similar once first-quarter weather effects are stripped out.

The Q3 figure gives the economy some decent momentum heading into the winter. It also helps the 2011 arithmetic. As for 2010, even before the big data revisions, growth will be not far short of 2%, More here.

I've been in Riga, Latvia, speaking at a conference organised by Latttelecom, the country's main telecom firm. Latvia suffered an 18% drop in GDP last year and a peak to trough fall of more than 25%, making it the worst crisis-driven recession in the European Union, and possibly the world.

The good news is that recovery appears to be under way, though another set of austerity measures is due, and that the current account has staged a remarkable turnaround, from huge deficit to surplus. The bad news is that it takes a long time to get back after a recession like that. But Latvia's still standing.

It is interesting that £10 billion of the planned £81 billion of spending cuts in the comprehensive review are from savings on debt interest. Interesting too that by squeezing an additional £7.5 billion out of welfare the chancellor has managed to reduce the planned real cuts in non-ringfenced departments to 19%.

There's plenty of detail on those welfare savings, and George Osborne was able to announce quite a lot of spending lollipops in his speech. Otherwise, however, the detail of where the cuts will come is mostly still awaited. The spending review is here.

One shift. welcomed by business, was that capital spending is being cut by £2 billion less than was signalled at the time of the June budget, though that appears to have reflected the difficulty of getting out of existing contracts than a fundamental change of heart. Even so, Osborne was able to announce a series of public capital projects that will be going ahead, including hospitals, road and rail improvement schemes and, perhaps most significantly, London's Crossrail project.

The Treasury, with an innovative distributional analysis, worked hard to demonstrate that, even when the welfare cuts are factored in, the pain of the cuts extends well up the income scale and even that higher income groups suffer more. That's just about plausible when Labour's tax hikes are factored in but much harder to argue on spending alone.

Adam Posen voted for £50 billion more of quantitative easing, Andrew Sentance stuck to his strategy of raising rates but otherwiswe there was no change, making it a three-way split on the monetary policy comittee. The minutes are here.

Mervyn King makes four big speeches a year and his latest, to the Black Country Chamber of Commerce, touched on the topic of the moment, currency wars.

Warning that the "Nice" decade will be followed by a "Sober" decade (savings, orderly budgets, and equitable rebalancing) - it will never catch on - the Bank of England governor calls for a "grand bargain" on the world economy:

"A bargain that recognises the benefits of compromise on the real path of economic adjustment in order to avoid the damaging consequences of a move towards protectionism. Exchange rates will have to be part of such a bargain, but they logically follow a higher level agreement on rebalancing and sustaining a high level of world demand."

The consequences of failure, he says, could be severe: "The need to act in the collective interest has yet to be recognised, and, unless it is, it will be only a matter of time before one or more countries resort to trade protectionism as the only domestic instrument to support a necessary rebalancing. That could, as it did in the 1930s, lead to a disastrous collapse in activity around the world. Every country would suffer ruinous consequences – including our own."

Of more immediate interest to the markets will be King's broad hint that he favours further quantitative easing. The money supply is not growing, he says, and: "There is also a risk ... that once the temporary upward influences on inflation dissipate, the influence of spare capacity in the economy will push inflation below the target.

"Consistent with that possibility, a range of other indicators – growth in broad money, pay, and the pressure of demand on supply, that together are likely to be a more reliable guide to inflationary pressure looking ahead – all remain extremely subdued. So not only can monetary policy play a role in smoothing the rebalancing process, it needs to do so if the outlook for inflation is to remain in line with the 2% target in the medium term." The speech is here.

The latest labour market statistics probably look a little better than they are. Though the claimant count edged up for a second month in a row, rising by 5,300 to 1.47 million, the Labour Force Survey data were strong. Employment rose by 178,000 in the three months to August, pushing the employment rate up from 70.5% to 70.7%.

Unemployment, meanwhile, dropped by 20,000 to 2.45 million, pushing the unemployment rate down from 7.8% to 7.7%. There was a much bigger fall in the three months of July, suggesting that on the LFS data too, there was a softening over the summer. Earnings growth edged up from 1.3% to 1.7%. More here.

The inflation rate remained at 3.1% in September, above the Bank of England's comfort zone, and offering nothing to either side in the great monetray policy debate. There were some big movements in the data, including falling air fares, petrol prices and second-hand car prices, offset by higher food prices and a 6.4% jump in clothing and footwear prices, a record for the month.

The latter, which represents a bigger-than-usual bounceback from the summer price cuts, leaves clothing and footwear prices a modest 0.9% up on a year earlier, though this is in contrast to the falls of recent years. Both retail price inflation and retail price inflation excluding mortgage interest payments (RPIX) slipped from 4.7% to 4.6%.

Overnight, the quarterly British Chambers of Commerce survey and the Royal Institution of Chartered Surveyors and British Retail Consortium monthly surveys were somewhat though not spectacularly softer. The trade deficit narrowed in August from £5 billion to £4.6 billion, though both exports and imports of goods fell on the month. More here.

David Miles, a member of the Bank of England's monetary policy committee (MPC) is thought to be leaning towards more quantitative easing, though his speech offered a vision of the future in which the Bank could be blamed either way.

"UK inflation now sits uncomfortably above the target. But I believe that this tells us rather little about the cyclical position of the economy or where inflation will be in the future. Underlying forces that were created by the financial crisis and that would themselves keep inflation low have been offset by other factors that have kept inflation above target for much of the past year. These factors are well known but it is important not to forget the likely scale of their impact. Around one quarter of the goods that enter the basket for calculating the UK CPI are imported. The 25% depreciation seen since 2007 would – given that imported goods and services account for around a quarter of the consumer price basket – add a bit above 6% to the level of the CPI. Over a three-year-period that would generate 2% a year higher inflation. We have also seen the VAT rate cut and then increased."

He concluded: "It is inconceivable that you can get monetary policy exactly right. After the event we will have a better idea of which way we got things wrong. It is a near certainty that four or five years from now the monetary policy that is set over the next year will, with the benefit of hindsight, look very likely to have been too loose or too tight. Many then will talk about the big mistake the MPC made in late 2010 and the first part of 2011. If we tighten too quickly it will be a story of “myopic MPC learnt nothing from events of 2008”; if growth and inflation look stronger than I now think is the most likely outcome it will be “MPC completely failed to see what was obvious to nearly everyone - that inflation was out of control”. But the only sensible thing to do is to look at all the evidence we have today, and balance the risks."

The speech is here.

The three winners of the Nobel prize for economics (the Bank of Sweden prize) are Peter Diamond, Dale Mortensen and Christopher Pissarides, the latter from the London School of Economics. They have won the prize "for their analysis of markets with search frictions".

This is the LSE's description of Professor Pissarides work: Professor John Van Reenen, Director of LSE's Centre for Economic Performance, where Professor Pissarides has worked for the past two decades, comments on the award:

‘Hearty congratulations to LSE's new Nobel Laureate, Chris Pissarides. ‘Chris has been a cornerstone of life at the Centre for Economic Performance (CEP) since our foundation in 1990 and has led our successful programme on macroeconomics, particularly on unemployment.

‘I am delighted that Chris has been recognised for his outstanding work in understanding how markets really work. Rather than assuming that workers were being smoothly and instantaneously matched with jobs as in traditional models, he elegantly modelled the process by which both sides are constantly searching for opportunities to find the right match.

‘These "frictions" matter substantially for our understanding of movements between jobs and unemployment. They are not mere analytical inconveniences but fundamental to our analysis of aggregate unemployment and business cycles.

‘The problem of unemployment is the major challenge facing policy-makers today after the worst recession since the Second World War. Not only has Chris been intellectually engaged with the foundations of economics, but he has also applied these principles to understanding policy issues, especially in Europe.

‘In a series of papers, he has shown how labour market regulations, entry barriers to setting up new service firms, tax and welfare policies affect differences in employment across the world. For example, many of the policies underlying the European Lisbon Agenda to tackle job creation (such as making the labour market more flexible), were based on the right economic principles but the main barriers to implementing them was lack of political will.

‘In recent years, Chris has expanded the application of search models to many other areas, such as understanding growth, female participation in the labour market and new technology. His work on matching has been applied to many other markets where finding a good match is very important such as housing and marriage.’

This is the Nobel announcement.

After the Halifax reported a 3.6% plunge in house prices in September, a calmer view is provided by Acadametrics, which produces its monthly house prices index for LSL Property Services. It has prices rising by 0.2% in September, and 7% on a year earlier, though they have essentially been flat over the past six months; up by just 1%. Perhaps the best news was in the transactions data, up 3.4% in September for a rise of 11.5% on a year earlier. More here.

Weak September US payroll numbers, down 95,000 on government cutbacks, add to the argument for more quantitative easing by the Federal Reserve. Here, the Bank also has to keep an eye on the inflation numbers. Producer price figures showed output price inflation edging down from 4.7% to 4.4% but input price inflation climbing from 8.7% to 9.5%. More here.

The Bank of England's monetary policy committee left Bank rate on hold at 0.5% and declined to add to the existing £200 billion of quantitative easing, as expected. There will have been a split vote, the question is whether it was a two-way or a three-way split.

The Bank held in spite of the release of figures from the Halifax showing a record 3.6% drop in house prices in September. Even the Halifax appeared embarrassed by the figures, which look like an aberration.

There was more predictable news from industry, with both manufacturing and overall industrial production rising by 0.3% in August. The 12-month rises, 6% and 4.2% respectively, look impressive. More here.

The International Monetary Fund, in its twice-yearly World Economic Outlook, attaches the word "fragile" to the global economy but nevertheless predicts strong 4.8% growth this year, followed by 4.2% in 2011. It predicts that world trade will grow by 11.4% this year, following its 11% fall last year, and will grow by 7% in 2011.

One of the big stories is the gap between the growth performance of advanced economies - 2.7% this year, 2.2% in 2011 - and emerging economies, 7.1% and 6.4% respectively.

This is the IMF's overall message:

"Thus far, economic recovery is proceeding broadly as expected, although downside risks remain elevated. Most advanced and a few emerging economies still face major adjustments, including the need to strengthen household balance sheets, stabilize and subsequently reduce high public debt, and repair and reform their financial sectors.

"In many of these economies, the financial sector is still vulnerable to shocks, and growth appears to be slowing as policy stimulus wanes. By contrast, in emerging and developing economies prudent policies, implemented partly in response to earlier crises, have contributed to a significantly improved medium-term growth outlook relative to the aftermath of previous global recessions."

The forecast is here. The IMF's growth forecasts for the UK, 1.7% this year, 2% in 2011, will inevitably attract some attention.

The politics of the government's clumsy axing of child benefit for higher rate taxpayers, which will surely have to be revisited, are that you have to show the better-off are suffering in order to be able to spread the pain more widely. But if this £1 billion cut is symptomatic of the problems in securing the other £80 billion or so, things are going to be difficult.

The economics of the cut are that tough action is needed to cut a gaping budget deficit. That is true and both George Osborne and David Cameron have said the problem is underlined by the fact that Britain has the biggest budget deficit in the G20. It is a small point but that is probably not true. Last year, according to the IMF, America had a deficit of 12.5% of GDP, compared with 10.9% for Britain. This year, 2010-11, the Office for Budget Responsibility says Britain's deficit will be 10.1% of GDP, below America's 11%. The government is right to stress the need for fiscal action but it shouldn't talk up Britain's problems beyond what the data will permit.

Meanwhile, there was good news in the service sector purchasing managers' index, which rose from 51.3 to 52.8, though new business growth was weak. On Monday the construction sector PMI also showed a rise.

UK households have injected a net £44 billion of equity into housing over the past two years, reversing the pattern of equity withdrawal witnessed during the long upturn. The phenomenon is mainly due to older people leaving the housing market and fewer newer entrants, and those new entrants generally having lower loan to value ratios.

This is what the Bank of England, which prepares the data, said:
"Housing equity withdrawal (HEW) was -£6.2bn in Q2 2010, slightly more negative than the Q1 2010 figure of -£5.3bn (revised down from the previous published figure of -£3.2bn). Individuals have injected £44.2bn into housing equity since Q2 2008 (when the HEW measure turned negative). HEW as a percentage of post-tax income was also slightly more negative than the previous quarter, at -2.5% compared to -2.1% in Q1 2010 (down from the previously published -1.3%)."

Manufacturing growth weakened slightly in September. The purchasing managers' index for the sector slipped from 53.7 to 53.4.

The Nationwide reported that house prices edged up by 0.1% in September, but are down on the latest three months, for the first time since May 2009. The figures suggest a market going nowhere fast.

The Bank of England's latest credit conditions survey, meanwhile, suggested some modest easing of conditions. It said:

* Lenders reported that the availability of secured credit to households had risen slightly in the three months to early September 2010 despite a tightening in wholesale funding conditions. Availability was expected to remain broadly unchanged in the next three months.

• Unsecured credit availability to households was reported to have remained broadly unchanged for a third consecutive quarter, but some lenders expected availability to increase somewhat in the next quarter.

• The overall availability of credit to corporates was reported to have increased for a seventh consecutive quarter, with a larger increase reported in availability to small businesses than for larger companies.

On the face of it, the latest numbers from the Bank of England were not too bad. Adjusted M4 money jumped by £12.8 billion in August, after contracting by £0.2 billion in July, though the Bank is clearly concerned about the seasonal adjustment in these figures. The 12-month growth edged up from 1.2% to 1.6%. The chart above also suggests a modestly improving picture for lending to non-financial businesses (private non-financial corporations) though this is sensitive to the choice of series.

Lending to individuals rose by £1.7 billion, despite a modest repayment of consumer credit. Mortgage approvals slipped to a six-month low of 47,372 but are essentially flat. More on the Bank website.

The KC Stadium in Hull has seen its ups and downs as far as football is concerned. Now it has been provided with a bit of monetary policy drama, courtesy of Adam Posen, the American member of the monetary policy committee (MPC). After Charlie Bean urging people to spend not save, the MPC is in danger of sounding worried.

Posen said he was anxious to stimulate debate. "The case I wish to make is that monetary policy should continue to be aggressive about promoting recovery, and, subject to further debate, I think further easing should be undertaken," he said.

"The risks that I believe we face now are the far more serious ones of sustained low growth turning into a self fulfilling prophecy, and/or inducing a political reaction that could undermine our long-run stability and prosperity. Inaction by central banks could ratify decisions both by businesses to lastingly shrink the economy’s productive capacity, and by investors to avoid risk and prefer cash. Those tendencies are already present, and insufficient monetary response is likely to worsen them. The combination of those risks with the potential attainable gains motivates my call for additional monetary policy stimulus."

He thinks any new easing should differ from the existing £200 billion of QE: There is "a legitimate issue whether the only assets to be purchased by central banks should be (medium- to long-maturity) government bonds, or whether other private assets (such as corporate bonds, commercial paper, or high quality mortgages) might be purchased in quantity by central banks as well. My feeling has always been that while purchasing private assets has some risks, notably in terms of public holdings overhanging market prices, and of difficulty in exiting the position in a given asset market when monetary contraction becomes desirable, these risks are manageable or at least much smaller than the macroeconomic risks of inaction. In fact, my instinct, and I believe that I am not alone in this view, is that purchasing private assets should have a larger macroeconomic impact than purchasing government bonds."

Bold stuff, and one that indeed opens up the debate. He says he is not committing himself to voting for more QE. It can only be a matter of time. The speech is here.

The government's Independent Banking Commission is headed by a competition expert, Sir John Vickers, so it was natural that it looked at competition within the banking sector as well as structure. So the Commission's Issues Paper, here, looks at both.

These are big issues. The subject of competition within the UK banking sector has occupied great minds over many decades, yet we emerge from the crisis with a more concentrated banking system than before, largely thanks to the Lloyds-HBOS merger.

On the issues of structure, on which there is not a huge amount of expertise on the Commission, all options are open. They include a UK version of Glass-Steagall, a ban on proprietary trading by banks (which may be a bit of a red herring in the UK context), and "narrow" or "limited purpose" banking, as set out by Laurence Kotlikoff in Jimmy Stewart is Dead. There was, of course, a run on Jimmy Stewart's bank in It's a Wonderful Life.

The Commission has called for evidence by mid November and will report in a year's time. In the meantime, the best thing the government could do for it is stop Vince Cable prejudging its conclusions. A gag on the business secretary would be helpful.

As expected, the Bank of England's monetary policy committee voted 8-1 to leave Bank rate on hold at 0.5% and maintain the existing £200 billion of quantitative easing. Andrew Sentance was the lone wolf voting for a rate hike.

The hint of further easing was not as strong as provided by the Federal Reserve on September 21, but it was there. This is the key passage: "On balance, most members thought that the current level of Bank Rate and stock of asset purchases financed by the issuance of central bank reserves remained appropriate to balance the risks to the inflation outlook in the medium term. But both key risks were substantial, and these members stood ready to respond in either direction as the balance of risks evolved. For some of those members, the probability that further action would become necessary to stimulate the economy and keep inflation on track to hit the target in the medium term had increased."

The minutes are here.

For the coalition government, keen to emphasise that there is no alternative to tax hikes and spending cuts, too rapid an improvement in the public finances could have been an embarrassment. The August figures show that you should be careful what you wish for.

Public sector net borrowing excluding financial interventions was £15.9 billion in August, up from £14.1 billion in August 2009. The improvement in year-on-year comparisons has come to an end, for now at least. The current budget deficit was £13.1 billion, up from £11 billion in August 2009. Cumulative net borrowing for the first five months of the fiscal year, £58.1 billion, was only marginally lower than the 2009-10 equivalent of £61.9 billion. More here.

Growth in the broad measure of the money supply, M4, remains extremely weak. Seasonally adjusted provisional M4 decreased by £4.1 billion (0.2%) in August, compared with an average monthly increase for the previous six months of £2.2 billion. The 12-month growth rate fell to a new low of 1.8% from 2.3% in July.

M4 lending decreased by £18 billion (0.7%) in August. The 12-month growth rate fell to 0.6% from 1.5% in July. M4 lending (excluding the effects of securitisations etc.) decreased by £18 billion (0.7%) in August. Its 12-month growth rate fell to -0.5% from 0.5% in July.

These were weak figures, of which more here. They were combined with the latest Trends in Lending report, here, which showed weaker lending to both businesses and consumers. This is the creditless recovery.

Two things stand out from the latest labour market statistics. One is the scale of the employment rise over the May-July period, 286,000, giving the biggest increase in the employment rate, which went up from 70.3% to 70.7%, since 1989. The other was that men are doing a lot better than women. Their employment rose by 221,000, compared with 65,000 for women.

There is a big part-time element in these numbers but they were nevertheless very strong. The unemployment numbers, by contrast, were a touch disappointing. The Labour Force Survey rate dropped from 7.9% to 7.8% over the latest three months, but that equated to a drop of only 8,000 to 2.47 million. The claimant count, meanwhile, edged up by 2,300 to 1.47 million, with male unemployment falling, female unemployment rising. It will be interesting to see whether the employment or unemployment numbers get the most coverage.

Earnings growth, meanwhile, rose to 1.5% in the three months to July, from 1.1%. More here.