The service sector purchasing managers' index slipped to 51.6 in June from 51.7 in May but remains consistent with expansion in the sector. Indeed, according to Markit, which produces the data, the June PMIs signal growth for the economy as a whole.

"A weighted combination of the output indices from the three PMI surveys that are conducted by Markit in the UK in association with CIPS shows that the output of the three sectors increased for the second successive month in June. At 51.0, up from 50.4 in May, the ‘all sector’ index also indicated a modest acceleration in the rate of growth to the fastest since March 2008."

Also out, figures from the Bank of England showing that housing equity withdrawal was negative by £8.1 billion, 3.5% of post tax income, in the first quarter. A year earlier HEW was positive to the tune of 2.9% of income. The release is here.

It isn't my job to advise Gordon Brown but his performances in prime minister's question time are becoming a national embarrassment. "Zero per cent growth" indeed. However hard he tries to disguise it, the Treasury's plans for the period 2011 to 2014 imply a real cut in overall public spending and deep cuts (though these are implied rather than explicit) in departmental spending.

This is what I would do: concentrate on the numbers for the whole of the next parliament rather than just the 2011-2014 period. The sequence for total spending in real terms, 2009-10 prices, is courtesy of the Institute for Fiscal Studies: £682 billion in 2009-10, then £702 billion in 2010-11, £700 billion in 2011-12, £701 billion in 2012-13 and £700 billion in 2013-14.

2009-10 is the last full year of this parliament. 2013-14 will probably be the last full year of the next parliament. Comparing the two, Brown could say that the Treasury plans imply a real spending rise albeit a modest one (2.6% over four years) during the next parliament. Or he could carry on making a fool of himself ...

It's a slow process but at least it is moving in the right direction. The Bank of England's credit conditions survey suggests a modest improvement in credit availability over the past three months with a further improvement expected over the next three. It can be accessed here.

The purchasing managers' index for UK manufacturing rose to 47 in June, from 45.4 in May, signalling that the sector is close to stabilising. The output index rose to 52.1. Taken together with official data showing a negligible 0.1% fall in service sector output in April, the figures are an antidote to yesterday's downward revision in first quarter GDP.

The eurozone manufacturing PMI rose to a nine-month high of 42.4, while there was also better news for German retail sales, up 0.4% in May following a 0.5% rise in April. German consumers need to spend to offset the weakness in world trade. China's PMI edged up to 53.2, from 53.1.

Britain's first quarter domestic product had been expected to be revised lower, following the release by the Office for National Statistics (ONS) of much gloomier numbers for construction output. But the scale of the downward revision, from a drop of 1.9% to one of 2.4%, the worst since 1958, was a surpise, reflecting also service-sector weakness.

The drop in GDP between the first quarters of 2008 and 2009 is now put at 4.9%, a record, and the official figures confirm that the recession began in the second quarter of 2008. All in all, a bad set of figures. They could be a "kitchen sink" set of numbers - everything bad thrown in - and they should certainly mark the worst we'll see, if not for another 50 years. Do you go from a 2.4% first quarter fall to a flat second quarter? It's possible, though perhaps a statistical stretch too far. More details here.

As the battle over who should be responsible for preventing a re-run of the banking crisis continues, the Bank of England has set out some thoughts in its Financial Stability Report. It sets out five principles for reform of regulation, while warning that the system remains vulnerable.

"Policies on market discipline, bank regulation, market infrastructure and bank structure and size should be based on their impact on overall financial system stability, not just on individual firms," it says. "This systemic perspective has not always shaped policy around the world sufficiently in the past." The report can be accessed here.

The OECD's Economic Outlook says that the global recession is close to bottoming out but that recovery prospects are weak. Even so, it thinks avoiding a worse outcome is "a major achievement" of policy. On its projections, the OECD economy will begin to grow - modestly - in the fourth quarter. That's gloomier than some, but probably close to the consensus. A summary of its projections is here.

In a speech to the Society of Business Economists, Spencer Dale, the Bank of England's chief economist, debated whether it would be helpful if the monetary policy committee (MPC) committed itself to keeping Bank rate at its present low level for a specified period.

He comes out against such a strategy, because circumstances can change quickly, while defending the inflation target - as Bank people tend to do these days. His broad conclusion is that interest rates aren't enough and that the Bank needs more weaponry. Also that mere "leaning against the wind" during the asset price boom years would not have been sufficient, or removed the need to take hard decisions. The speech is here.

After two strong months, official retail sales fell by 0.6% in May and were down by 1.6% on May 2008's unusually strong figure. Sales in the latest three months were 0.6% higher in volume terms than a year earlier and were 0.3% up on the previous three months. Good weather, for once, may have depressed sales. More here.

The public finances, meanwhile, are still in a bad way, with a May current budget deficit of £17.5 billion, compared with £10.6 billion a year earlier. It's too early to say whether things are turning out worse than the Treasury's forecast but it hasn't been a great start to the fiscal year. More here.

Mervyn King wants more supervisory powers for the Bank of England, aware that raising his eyebrows does not go very far these days. He also thinks no bank should be allowed to become too big to fail. This is his speech at the Mansion House.

Alistair Darling thinks bank boards should look at their own failings but remains confident of economic recovery around the turn of the year. He does not appear to favour limiting the size of banks but promises his proposals soon. This is what he had to say.

Unemployment will continue to rise until the economy is growing in line with trend, or later, and we are a long way away from that. Even so, the latest numbers were not as bad as some feared. The Labour Force Survey measure of unemployment rose by 232,000 in the three months to April to 2.26 million, or 7.2% of the workforce.

The better news came in the claimant count, which continued its run of smaller-than-expected increases, rising by 39,300 last month to 1.54m. Average earnings growth excluding bonuses was 2.7%, the weakest since 2001. More details here.

Also published today, what at first glance looks like an unremarkable set of MPC minutes.

The apppointment of Adam Posen to replace the outgoing Tim Besley on the Bank of England's monetary policy committee (MPC) is quite a coup and suggests the Bank has not lost its pulling power. It also maintains the MPC's transatlantic links following Danny Blanchflower's departure. Posen is deputy director of the Peterson Institute in Washington and has a good reputation. His biography is here.

Consumer price inflation fell from 2.3% to 2.2%, higher than expected and still above the official 2% target. Excise duty increases in the budget, together with increases in the prices of electronic goods, DVDs, etc. were responsible for the smaller than anticipated fall. Part of the reason may be that retail sales have held up better than expected. Most is explained by the temporary effects of sterling's fall, now partially reversed.

While some will see these figures as evidence of an incipient UK inflation problem that would be a mistake. The sterling effect will wear off and inflation stay low for a considerable time. RPI inflation was negative by 1.1%, compared with 1.2% in April. RPIX inflation, the old target measure, was 1.6%, compared with its old 2.5% target. More details here.

Peter Bernstein, who died last week at the age of 90, wrote Against the Gods, a brilliant history of risk management, as well as a series of other books bringing together economics and investment. Against the Gods is available on Amazon. This was his website.

The Bank of England's quarterly bulletin contains a comprehensive article on quantitative easing, which is a useful reference, and on negative equity, which it estimates is affecting between 7% and 11% of households with mortgages (that's about 40% of all UK households). Some have relatively small amounts of negative equity, it says, but also argues that in theory, given problems in the banking system, it should be a more serious problem now than in the early 1990s. But arrears and repossessions are lower than then. The bulletin is here

The FT-Acadametrics house price index fell by 0.7% in May and was down by 14.1% on a year earlier. The index, reflecting prices at completion, is gloomier than the latest readings from the Halifax and Nationwide, partly because it reflects sales agreed some months ago. But it also shows signs of a diminishing pace of decline and its compilers suggest prices may bottom out later in the year. The index is here.

Home.co.uk said asking prices have slipped by 0.1% this month and are down by 5.5% on June last year. But its 'time on market' indicator suggests activity is picking up.

Britain's manufacturing sector has been hard hit by the recession but appears to be over the worst. Output actually rose by 0.2% in April and revisions to the data mean it also rose by 0.2% in March. Overall industrial production rose by 0.3% in April. If manufacturing is coming through the worst, hard hit as it was by the collapse in trade and a sharp run down of inventories, this bodes well for the rest of the economy and in particular gross domestic product in the second quarter. More details here.

Less encouragingly, the trade deficit widened to £3 billion in April, from £2.7 billion in March, reflecting a rise in imports. More on that here.

Whether it amounts to a new economic model or not, and it lacks detail, but this is George Osborne's current thinking on what a Conservative government would do that is different to Labour. His first priority is "a clear plan to deal with the huge budget deficit", his second is to build an economy based on savings and investment and his third is to end short-termism. And on the fourth day ...
I suspect priority one will occupy most of any new chancellor's time. The speech is here

With so much going on in politics, the economy has benefited from being out of the spotlight. Not only have the figures been a lot stronger than expected but, until it hit some political turbulence of its own towards the end of last week, sterling had rallied significantly.

There are more green shoots around and a few brief points are worth making. First, while it would be premature to say the recession is over — given that we will almost certainly see a further, though smaller, drop in gross domestic product in the current quarter — a return to growth is in sight during the second half of the year.

Alistair Darling has had more to think about than his economic forecasts recently but, for all the mocking they received, there is a good chance that his budget predictions will turn out to be right.

Second, for all that excitable "Britain is a basket case" talk, and accepting this is a bad recession for everybody, the UK economy is doing no worse, and in some cases better, than others. Chris Williamson of Markit, which produces the monthly purchasing managers' surveys, thinks Britain will pull out of recession three months earlier than the eurozone, having suffered less than Europe in the first quarter.

Third, there is a risk that the economic bounce we will see later this year will not be sustained. Instead of a V-shaped recession, we could get a "W", in which there is another downward lurch before a sustained recovery, a "square-root" recovery (think of the sign from school), in which the initial bounce is followed by stagnation, or even a series of "W" episodes, bumping along the bottom.

Treasury officials fear that a strong upturn in the final months of this year, prompted by spending ahead of Vat being raised back to its normal level next year, could be followed by a relapse. Others warn that a combination of fiscal and monetary tightening, both of which will be necessary, will nip any recovery in the bud.

For me, one of the central questions is whether a pick-up in growth can be sustained even when bank lending remains weak. Amid the flurry of stronger news last week was some downbeat evidence from the Bank of England on lending.

Lending to households rose a modest 0.2% in April, the Bank said, and was up by 3.4% on a year earlier. But lending to nonfinancial companies fell by 0.9% and was a tiny 0.8% up on a year earlier.

This chimed with a survey from the Engineering Employers' Federation, which showed that 45% of firms had seen an increase in the cost of their finance and only 4% had seen an improvement in credit availability in the latest three months. It is a familiar story throughout business.

Charlie Bean, the Bank's deputy governor, buys into the story of a resumption in growth before the end of the year, but he also warned in a recent speech that bank lending was likely to remain subdued, at best, for some time.

"We are still some way from having banks feel sufficiently secure that they can lend normally, and from investors that have enough confidence in the banks to provide them with sufficient funds," he said.

The government's October banking measures were a straightforward rescue operation but its subsequent actions, particularly in January, have been intended to get lending flowing again. Quantitative easing, confirmed last week at £125 billion for now, was intended to boost lending and, while it is early days, is not doing so.

One reason may be the way it is operating. Mervyn King, governor of the Bank, professed last month not to be worried that many of the gilts sold to the Bank under the quantitative-easing programme have come from foreigners — in March and April they sold £17.9 billion, more than twice those sold by UK institutions.

I think he should be concerned about this leakage in the policy. Michael Saunders of Citigroup believes the Bank could avoid this problem by deliberately purchasing gilts not typically owned by foreigners, those with more than 25 years to maturity.

So are we condemned to a dead-cat bounce, before we sink back into credit-starved stagnation, with a loss of banking capacity, over-cautious bankers and regulators locking the stable door long after the horse has bolted?

Maybe not. While people focused on the weakness of lending, Simon Ward, an economist with Henderson New Star, said the big story in the Bank's numbers was a 1% monthly rise in its adjusted measure of the money supply, M4. There are many factional debates in economics, but one current one is between the monetarists and the "creditists". Ward is in the former category and believes undue emphasis is being placed on the lending numbers.

He thinks the weakness of credit is in part explained by past economic weakness. That is certainly true of mortgages, where very weak mortgage approvals over the winter are being reflected in the hard lending data now. He also believes the pick-up in money-supply growth now, if sustained, will lead to a rise in credit growth. Those expecting an instant revival of bank lending, in other words, were putting the credit cart before the monetary horse.

Another possibility, given the traumas the banking system has been through, is that it is unrealistic to expect a genuine revival of lending. The banks are on official life support. You would not expect them to start running marathons again.

The International Monetary Fund (IMF), in its spring World Economic Outlook, produced a comprehensive analysis of past recoveries from recession. It showed, for example, that the more rapid the economic slide, the sharper the first year of recovery.

However, the IMF also pointed out that upturns from recessions that have their origins in financial crises tend to be "creditless". After these recessions it takes an average of seven quarters after gross domestic product has turned up before the growth of credit turns positive. Economies can grow, in other words, before credit does.

It may be that we will see something similar this time. Credit availability is a genuine problem for many firms but can the UK economy recover without a strong revival of credit growth? Probably it can.

It will mean that the economy in the recovery phase will be different, with spending financed out of income rather than borrowing and cash-generating businesses benefiting at the expense of credit-hungry ones. But that will be no bad thing.

PS: Talking of monetarists, the life of one of Britain's most distinguished, Sir Alan Walters, was celebrated last week in London. Walters, Margaret Thatcher's former personal economic adviser, who died earlier this year, was remembered with humour and affection.

Most of all, as Thatcher recalled in comments read out on her behalf, he was always both intellectually rigorous and principled. As she put it: "His influence upon the economics of a generation has been immeasurable and we are the worse off today that he is not here to dispense his wise guidance at another time of economic crisis. I am sure that he would have a great deal to say about the direction in which we are going."

From The Sunday Times, June 7 2009

Bank rate maintained at 0.5% and no increase in the £125 billion figure for quantitative easing. This is the Bank's brief statement.

After moving sharply out of line with the Nationwide, the Halifax house price index caught up abruptly, reporting a 2.6% jump in prices in May, following falls averaging 2% a month over the previous three months. The annual fall is 16.3%. The Halifax, sensibly, is playing down the May numbers, pointing out that monthly rises can happen even when the trend is downwards. Even so, its figures are consistent with other evidence that stabilisation is in sight. Its release is here.

The service sector purchasing managers' index was better than expected, suggesting a return to growth in May. The PMI jumped from 48.7 in April to 51.7 in May, above the 50 level that normally represents the boundary between decline and expansion. Taken together with improvements in the other PMIs, for manufacturing and construction, the data suggests the UK recession may be coming to an end much sooner than expected.

Markit, which produces the data for the Chartered Institute of Purchasing and Supply, said: "A weighted combination of the output measures from the three UK PMI surveys rose above the critical no-change level of 50 in May. The rise means the UK is the first of the European economies to see a return to economic growth."

Levels of housing activity still look to be too low to support a rise in house prices but that is what the Nationwide has reported, for the second time in three months. It says prices rose by 1.2% in May, reducing the annual rate of fall from 15% to 11.3%. Limited supply may have pushed prices higher, it says, while stressing that it is too early to call the turn.

It is indeed possible that we are seeing a delayed supply response and that when supply does come on to the market prices will lurch down again. The Halifax index has yet to show convincing signs of a slowing pace of decline, let alone increases. Nonetheless, taking all measures together signs of stabilisation are evident in the data. The Nationwide release is here.

Recent GDP figures may be revised in time but it was too early to expect any change yet. Indeed, given the recent history of the data, it was perhaps a relief that there was no downward revision. The latest figures confirm the first quarter GDP fall at 1.9%, a drop of 4.1% on a year earlier. Inventories contributed about a third of the fall - over the past two quarters they have accounted for two-thirds of the GDP drop - but the decline was fairly broadly-based, government spending providing the only real support.

It rose by 0.3% at a time when household spending dropped by 1.2%, investment fell by 3.8% and exports dropped by 6.1%. The good news is that the first quarter fall should be the biggest in this cycle. The bad news is that it takes time to move from a 1.9% quarterly fall back to growth. More here.

It is easy to scoff at the ratings agencies, which proved themselves worse than useless in the run-up to the credit crisis, and S & P's decision to lower the outlook on Britain's sovereign debt from 'stable' to 'negative' seems to have been timed to do maximum damage.

Even so, while its projections for UK government debt look too high, its central message, that we have to have a post-election fiscal tightening beyond what is already in the plans merely echoes what is becoming the consensus view. This is its statement:

LONDON (Standard & Poor's) May 21, 2009—Standard & Poor's Ratings Services today said it had revised its outlook on the United Kingdom (U.K.) to negative from stable. At the same time, the 'AAA' long-term and 'A-1+' short-term sovereign credit ratings were affirmed. The Transfer & Convertibility (T&C) assessment for the United Kingdom is 'AAA'. Rating outlooks assess the potential direction of a rating, typically over a period of up to two years. An outlook does not necessarily precede a rating change.

"We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100% of GDP and remain near that level in the medium term," Standard & Poor's credit analyst David Beers said. "We base our opinion on our updated projections of general government deficits in 2009-2013. These projections reflect our more cautious view of how quickly the erosion in the government's revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and consequently the pace at which historically high fiscal deficits are likely to narrow."

Our projections also incorporate updated estimates of the cumulative potential gross fiscal cost of government support to the banking system, which we now estimate to be in the range of £100 billion-£145 billion, or 7%–10% of 2009 estimated GDP. Taken together, these factors could, in our opinion, result in a doubling of the general government debt burden to nearly 100% of GDP by 2013. A government debt burden of that level, if sustained, would in Standard & Poor's view be incompatible with a 'AAA' rating.

We believe that the ratings on the U.K. continue to be supported by its wealthy, diversified economy; a high degree of fiscal and monetary policy flexibility; and its relatively flexible product and labor markets. However, last month's budget announcements underscored that U.K. public finances are deteriorating rapidly--at a faster rate than Standard & Poor's had previously assumed. In January 2009, for example, when we last affirmed the ratings on the U.K., we assumed that the U.K. net general government debt burden would rise from about 49% of GDP in 2008 to 83% in 2013.

We note that there is support across the political spectrum for additional fiscal tightening. However, the parties' intentions will likely remain unclear until the next administration is formed after the general election, due by mid-2010. How quickly the government can stabilize and then reduce the government debt burden will also depend on the timing and shape of the economic recovery and whether the cost of government support of the banking system is higher than we currently assume, areas where we also see continued downside risks.

The negative outlook reflects Standard & Poor's view that, in light of the challenges to strengthen the tax base and contain public expenditures, the U.K. government debt burden could approach 100% of GDP by 2013 and remain near that level thereafter.

"The rating could be lowered if we conclude that, following the election, the next government's fiscal consolidation plans are unlikely to put the U.K. debt burden on a secure downward trajectory over the medium term," Mr. Beers said. "Conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing, or if fiscal outturns are more benign than we currently anticipate."

The International Monetary Fund has been in Britain to undertake its annual Article IV consultation and has published an interim report. Its views on the economic outlook are similar to those of the Bank of England and it supports much of the policy response by the authorities, including quantitative easing (QE). But it warns that vulnerabilities remain and that more surgery on the public finances, particularly on the spending side, will be needed. Not too many people would disagree with that. Its preliminary assessment is here.

Meanwhile Bank of England's monetary policy committee contemplated an additional £75 billion of QE before settling on £50 billion. The minutes of its May meeting are here.

For the first time in some months. inflation came in below expectations, consumer price inflation dropping from 2.9% to 2.3% and retail price inflation going further into negative territory, -1.2% versus -0.4% in March. Lower gas, electricity and food prices, unwinding some of last year's big increases, contributed to the fall.

This should remove some of the worries about the 'stickiness' of inflation and of inflation being a problem over the next couple of years. RPIX inflation, the Bank's old target, is at 1.7% (down from 2.2%) well below its old 2.5% target. CPI inflation will soon be below its 2% target. The next letter the Bank of England governor will have to write will be to explain why inflation has dropped more than a percentage point below target. The favoured timing for that is late summer. More details here

In its inflation report the Bank of England revised down its growth forecasts marginally and revised up its inflation forecasts, though they still point to consumer price inflation staying below the 2% target over the medium-term. Mervyn King, the governor, insisted the monetary policy committee would not hesitate to reverse both quantitative easing and current very low interest rates when circumstances warranted it.

The main message, however, was that the outlook is hugely uncertain. "Promising signs" that the pace of decline has begun to ease might not mean that a sustainable recovery will follow. Bank lending is more subdued than the Bank hoped in February and the supply-side of the economy has been damaged. The inflation report can be accessed here.

The monthly unemployment figures were not supposed to be released until tomorrow but the Office for National Statistics has been forced to release them early because some of the information leaked out. They show a big 244,000 rise in the Labour Force Survey measure of unemployment to 2.22 million in the first three months of the year, the unemployment rate rising from 6.7% to 7.1%. This was the biggest increase since 1981.

The claimant count showed a more modest April rise of 57,100 to 1.51m. Average earnings growth including bonuses fell by 0.4% on a year earlier, though ex-bonuses earnings continued to rise.

Though the first quarter figures were poor, these covered two months in each of which the claimant count rose by well over 100,000. The recent data was marginally more encouraging. More details here.

Though the first quarter was exceedingly grim both for manufacturing and industrial production more broadly defined, with declines of 5.5% and 5.3% respectively, there was better news in the March data. Manufacturing output slipped by only 0.1%, its smallest monthly decline for 13 months. More here.

The Royal Institution of Chartered Surveyors thinks the upturn in interest and activity continues in the housing market, although from a low base, but the rise in new buyer enquiries is particularly pronounced. Its survey is here. The British Retail Consortium also saw a better April, good weather and the timing of Easter working wonders for some stores.

Meanwhile the OECD reports an improvement in leading indicators for some countries, including the UK. It is here.

Producer price data showed the unwinding from last year's surge in commodity prices is continuing. Industry's input costs were down by 5% on a year earlier while output price inflation dropped to just 1.2%, despite a budget increase in excise duties. No sign of an inflation problem here. More details.

Nor is there evidence yet of house prices bottoming out. The FT-Acadametrics house price index is one I follow closely. It fell by 1.1% in April for a drop of 14.2% on a year earlier. From its peak, it has declined by 14.6%. The index is here.

The Bank of England held interest rates at 0.5%, as expected, but it also increased the size of the quantitative easing programme from £75 billion to £125 billion, which many did not expect. It could be that the emphasis for QE will switch to purchases of corporate bonds instead of gilts, following criticism of the record so far. The European Central Bank cut its main rate to 1%, as expected.

This is the Bank of England monetary policy committee's statement:

"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 continue with its programme of asset purchases financed by the issuance of central bank reserves and to increase its size by £50 billion to a total of £125 billion.

"The world economy remains in deep recession. Output has continued to contract and international trade has fallen precipitously. The global banking and financial system remains fragile despite further significant intervention by the authorities. In the United Kingdom, GDP fell sharply in the first quarter of 2009. But surveys at home and abroad show promising signs that the pace of decline has begun to moderate.

"CPI inflation was 2.9% in March, significantly higher than the 2% inflation target. Past falls in sterling have continued to put upwards pressure on inflation. But the degree of spare capacity in the economy has increased and the loosening in the labour market has contributed to a sharp easing in pay pressures. CPI inflation is likely to drop below the 2% target later this year, driven in part by diminishing contributions from food and energy prices. The substantial margin of spare capacity in the economy should continue to bear down on inflation thereafter.

"The Committee noted that the outlook for economic activity was dominated by two countervailing forces. The process of adjustment in train in the UK economy, as private saving rises and banks restructure their balance sheets, combined with weak global demand, will continue to act as a significant drag on economic activity. But pushing in the opposite direction, there is considerable economic stimulus stemming from the easing in monetary and fiscal policy, at home and abroad, the substantial depreciation in sterling, past falls in commodity prices, and actions by authorities internationally to improve the availability of credit. That stimulus should in due course lead to a recovery in economic growth, bringing inflation back towards the 2% target. But the timing and strength of that recovery is highly uncertain.

"In the light of that outlook and in order to keep CPI inflation on track to meet the 2% inflation target over the medium term, the Committee judged that maintaining Bank Rate at 0.5% was appropriate. The Committee also agreed to continue with its programme of purchases of government and corporate debt financed by the issuance of central bank reserves and to increase its size by £50 billion to a total of £125 billion. The Committee expected that it would take another three months to complete that programme, and it will keep the scale of the programme under review.

"The Committee’s latest inflation and output projections will appear in the Inflation Report to be published on Wednesday 13 May."

The purchasing managers' index for services, compiled by Markit for the Chartered Institute of Purchasing and Supply, jumped from 45.5 in March to 48.7 in April, only just below the 50 level signifying a return to growth. Most components of the index were strong. The other UK PMIs, for manufacturing and services, are also on a rising trend. All show that the economy is continuing to decline, but at a slower pace, a necessary precondition for a return to growth.

The Halifax house price index, however, showed a 1.7% April drop, after 1.9% in March. The rival Nationwide index has been stronger, though year-on-year falls for the two measures - 17.7% in the case of the Halifax - are similar.

Better news from the consumer sector, suggesting the impact of the massive easing of monetary policy may be starting to feed through, despite the headwinds of sharply rising unemployment and the credit crunch. The GfK-NOP consumer confidence index rose to its highest level for nearly a year, while confidence in the economy over the next year reached its best since August 2007, before the credit crunch started to bite. The consumer may be down but he or she is far from out. More details here.

Meanwhile, the Nationwide Building Society reported that house prices have fallen by 0.4% this month, following a 0.9% rise in March. Given that many analysts expected April's fall to more than reverse the March rise, the figures were better than expected, and pointed to a clear moderation in the pace of price falls. More here.

Alistair Darling primed the markets for a bad first quarter domestic product figure in his budget but the outturn, down 1.9%, was worse than expected. There's hope in the surveys to suggest the pace of decline will moderate in the second quarter, but the fall helps explain the huge deterioration in the public finances.

Both manufacturing, down 6.2% and services, down 1.2%, fell by more than in the fourth quarter of last year though construction output fell by less. The extent to which the fall was again due to very aggressive de-stocking will help determine the pace of the recovery when it comes. More details here.

Retail sales again surprised on the upside, rising by 0.3% in March compared with a year earlier. We are still spending on food and clothing, if not household goods. More details on that release here.

In the old days, the Treasury used to prepare the markets for the worst, and then unveil something rather better. This time the pre-budget guidance on the public finances understated the true horror.

After borrowing of £175 billion this year (2009-10), 12.4% of gross domestic product, borrowing declines glacially from then on, to £173 billion, 11.9% of GDP in 2010-11 and so on. Remember £118 billion? That was how much borrowing was meant to be this year. The new projections suggest we will not get down to that until 2012-13.

Much of the reaction to the new projections will be based on whether the Treasury's growth projections are plausible. In particular, for the purposes of the public finances it has assumed 3.25% GDP growth from 2011-12 onwards.

The Treasury's argument is that these numbers are in line with the recoveries from recession in the 1980s and 1990s and that this time the monetary and fiscal stimulus has been much bigger than then.

The counter argument, of course, is that the economy has been holed below the waterline by the credit crunch and that it will take years to float again, let alone grow rapidly. Add in tax rises and public spending cuts and the numbers look decidedly optimistic.

There is merit in both arguments. The 1990s' recovery occurred against the backdrop of rising taxes and a real freeze on public spending, and in the aftermath of a housing bust. What we did not have then, however, was the loss of bank lending capacity and the hangover of a credit crunch.

The real story, however, is that even with growth returning, the public finances are reckoned to remain in a very bad way. That is why the Treasury announced £26.5 billion of fiscal consolidation, split three ways between higher taxes (mainly on the rich), lower current spending and lower capital spending.

But it is also why more will be needed. Darling went for what was politically acceptable, to Labour at least. A new top rate on earnings above £150,000 will not encourage Swiss, French or German bankers to base themselves in London but many of them have gone home anyway. Combine it with restricting pension tax relief for these high earners (which officials probably thought necessary to protect revenues resulting from the tax hike from 40% to 50%) and this is a different world. Sir Fred Goodwin and his like have got a lot to answer for.

None of the detailed short-term measures in the budget were very memorable. We will, however, remember this budget for a long time, both the legacy of high government borrowing and debt - now expected to nudge 80% of GDP - and for its "thin end of the wedge" increase in taxes on the better-off.

One way or another, even higher taxes must surely come, though not until after the election. Not much jam today and plenty of pain tomorrow.

Unemployment continued to rise, as expected, though there was rather less of a horror story for the claimant count, which rose by 73,700 in March (to 1.46m), after February's record increase of 136,600. Monthly figures are volatile but the February increase is probably the biggest we will see in this cycle. The Labour Force Survey measure increased by 177,000 over the three months to February, hitting 2.1m and suggesting the trend rise in unemployment is around 60,000 a month.

Earnings growth reflected the bonfire of the bonuses, up just 0.1% in the three months to February compared with a year earlier. Excluding bonuses, the rise was 3.2%. More details here.

Meanwhile, the Bank of England's April minutes detected one or two signs of optimism in the data which suggested that the pace of decline might ease in the second quarter, but agreed to persist with the programme of quantitative easing. There were signs of modestly better conditions in corporate bond and commercial paper markets, it said. The minutes are here.

Other pre-budget data included slightly stronger mortgage lending from the Council of Mortgage Lenders), though still down more than 50% on a year ago, and the March public finances. These confirmed public sector net borrowing in 2008-9 at £90 billion, £12 billion more than the chancellor predicted in November. It could have been worse. There will be much more on the public finances later. The latest figures are summarised here.

We expected it a month earlier but it has now arrived. The retail prices index last month was down by 0.4% on a year earlier, the first "deflation" on this measure since 1960. The Bank of England will also be relieved that consumer price inflation, down from 3.2% to 2.9%, has dropped out of letter-writing territory.

It is still above the 2% target, though is set to fall significantly in the coming months. The government will be wishing it had stuck to RPIX (the retail prices index excluding mortgage interest payments), which dropped from 2.5% (its old target) to 2.2%. More details here on the inflation numbers, suggesting price pressures in food and energy have eased but that there is some pass-through from sterling's decline on prices of some goods.

The former Bank of England governor, who died on April 18 at the age of 70, could lay claim to have presided over one of the most successful periods in the Bank's long history. His tenure as governor, 1993 to 2003, was characterised by continuous growth and low and stable inflation. He, of course, was the first governor of an independent Bank.

He was always personally informal, preferring "Eddie" to "Sir Edward" or "Lord George" but was a fierce defender of the Bank's reputation, and of maintaining its high standards. It is interesting to speculate how he would have responded to some of the criticism faced by Mervyn King, his successor, in recent times. It is also interesting to speculate how he would have handled the banking crisis. Despite many requests, he always refused to go public with his views.

A couple of things that have featured in the obituaries deserve elaboration. My understanding was that his famous threat to resign in 1997 over Gordon Brown's decision to remove banking regulation from the Bank was based more on the manner of it, without consultation or pre-warning, than the decision itself. He accepted the potential conflict of interest between a "monetary policy" Bank and a regulator.

Did he acknowledge that the Bank deliberately stoked up the housing market, as some claim? Not in my view. He did say that the Bank acted to support domestic demand during a period of global economic weakness but that is a different thing. The Bank's announcement of his passing is here.

Ahead of today's meeting of the Bank of England's monetary policy committee (MPC), few expected a further cut in Bank rate but the markets were keenly interested in what the Bank would say about its £75 billion programme of quantitative easing (QE). Bank rate was duly left at 0.5% - the first freeze since October - and will stay there for a while.

Meanwhile, what the Bank said on QE was reassuring enough. It said: "The Committee also voted to continue with the programme, announced on 5 March, of asset purchases totalling £75 billion financed by the issuance of central bank reserves. The Committee noted that since its previous meeting a total of just over £26 billion of asset purchases had been made and that it would take a further two months to complete that programme."

Though Britain's overall trade deficit widened from £3.1 billion to £3.2 billion between January and February, reflecting a smaller surplus on services (down from £4.7 billion to £4.1 billion), there was some evidence in the latest numbers that the pound's weakness is starting to help goods.

The trade deficit in goods narrowed from £7.8 billion to £7.3 billion, as exports rose and imports fell. There was a big narrowing of the good deficit with countries outside the European Union, down from £5.6 billion to £4 billion. More details here.

Meanwhile, 'pipeline' inflation pressues continued to ease, with output price inflation (factory gate inflation) down from 3% in February to 2% in March and input prices in the 12 months to March down 0.4%. More here.

The London G20 summit's conclusions were more wide-ranging than expected and included what was described as "an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy". This consisted of a trebling of IMF resources to £750 billion, an extra SDR allocation of $250 billion and $250 billion of export finance. This is its lengthy communique.

The tone of housing market data has been improving but nobody expected house prices to start rising yet, so the Nationwide building society's report of a 0.9% increase in March was a surprise and should be treated with a certain amount of caution. The annual rate of decline fell from 17.6% to 15.7%.

To be fair to the Nationwide, it did not hail the figures as signalling a turn in prices. It said: "While the rise in prices in March is welcome, it is far too soon to see this as evidence that the trough of the market has been reached. The Bank of England has already taken strong measures to ease the tensions in economic and financial markets by cutting rates and commencing quantitative easing. However it will take time for these to work through into the housing market before we can expect a sustained recovery in house prices." The release is here.

Since the banking convulsions of last Sepember and October, pretty well every indicator has been pointing down. Now we are getting the first indications that the pace of decline may be slowing. The March CIPS/Markit purchasing managers' index for manufacturing, up from 34.9 to a five-month high of 39.1, is still consistent with falling output, but at a somewhat gentler pace than before.

Also today, Bank of England figures showed that housing equity withdrawal in the fourth quarter was negative by £8 billion, or 3.3% of post-tax income. The days when housing provided a boost to income are over, at least for now, though most housing equity withdrawal was always in the form of older people selling up on retirement. The release is here.

Revised GDP figures put the drop in the fourth quarter of last year at 1.6%, from an originally-estimated 1.5%. 2008 growth as a whole was unrevised at 0.7%. The downward revision, which puts Q4 GDP 2% lower than a year earlier, reflected weakness across the board, but in particular in construction, revised from a fall of 1.1% to a drop of 4.9%. It came in spite of an upward revision to business investment in the quarter. Household expenditure dropped by 1% as the saving ratio recovered from 1.7% to 4.8%. More details here.

Spencer Dale, the Bank of England's chief economist, gave this assessment of the outlook in a speech: "Near-term prospects are bleak. Output is likely to contract further in the first half of this year, as a weakening labour market and concerns about job prospects weigh on consumption, companies run down their stocks and scale back investment spending, and the synchronised slowing in world demand restrains export growth. But as we go through 2009, I believe it is most likely that the pace at which output is contracting will ease and that we will see some signs of recovery by around the turn of this year." The speech is here.

Official retail sales figures reflected what many retailers have been saying - things are tough out there. Sales fell by 1.9% between January and February and the annual growth rate slowed to just 0.4%. All categories of sales fell, though food held up better than non-food. More details here. Some retailers reported snow disruption for parts of the month, though there is no mention of that as a factor in the official briefing note.

Reports overnight suggest that there will be no significant giveaway in the April 22 budget, Gordon Brown having bowed to the reality of the very weak state of Britain's public finances. There was better news on business investment, revised to a decline of 1.5% in the fourth quarter from an initially-estimated 3.9% fall.

RPI inflation fell to zero last month, against widespread expectations of a significantly negative number. Higher food prices bumped up prices more than expected and sterling's depreciation appears to have had a significant impact, despite very weak demand. CPI inflation rose from 3% to 3.2%, against expectations of a fall. RPI deflation is still expected but we'll have to wait a month. Further details here.

The governor was required to write a letter to the chancellor explaining the CPI rise. His letter is here.

It seems to be a rule of this crisis that the more unconventional the policy announcements, the weaker the currency. So the dollar sold off significantly on the Fed's announcement, here, of $300 billion of purchases of long-term Treasury bonds and an additional $750 billion of mortgage-backed securities. But it's bold, and it may just work.

Meanwhile, the UK's public finances continue to deteriorate. There was a current budget deficit of £1.8 billion last month, compared with a £4.6 billion surplus a year ago. So far in this fiscal year there is a current budget deficit of £43.8 billion, compared with just £2.1 billion in the corresponding period of 2007-8. Public sector net debt rose to 49% of GDP. More here.

The Labour Force Survey measure of unemployment rose above 2m, as expected, rising by 165,000 in the latest three months (to January) to 2.029m, 6.5% of the workforce. The rise was unwelcome but in line with expectations. The really eyecatching number this morning, however, was the record 138,000 increase in the claimant count to 1.39m, 4.3% of the workforce. Together with upward revisions to earlier data, this gave a 595,600 jobless rise over the past 12 months. And earnings growth, including bonuses, dropped to just 1.8%. Details here.

The figures justify the Bank of England's decision to throw the kitchen sink at trying to boost the economy. Today's minutes of the monetary policy committee's March meeting reveal a unanimous vote in favour of cutting Bank rate to 0.5% and also how the Bank got to its initial £75 billion figure for asset purchases under the quantitative easing programme, also decided unanimously. The minutes are here.

Mervyn King, in a speech on Tuesday evening called for “simple and robust” regulation. Regulatory design, he said, “should be based on an explicit identification of the market failures that regulation can hope to correct”. He also highlighted the need to reduce the exposure of the financial system to domino effects – arising from the interconnectedness of banks – and the pro-cyclical behaviour of risk-taking in the financial system.

He said: “In particular, the authorities should maintain a clear focus on the issues that matter when the worst occurs – liquidity and leverage.” He added: “Given what has happened there is now international support for developing a counter-cyclical toolkit for the prudential supervision of banks.”

King said concerted international action was needed to boost confidence and restore the flow of credit: “Most of us come from the generation that grew up believing that mass unemployment and world recession were things of the past, relevant to the history books but not the textbooks. That assumption is under threat. We must rise to the challenge.” The speech is here.

Also overnight, Japan moved back towards the 2001-6 policy of quantitative easing by stepping up bond purchases. More here.

The Bank of England, in its Quarterly Bulletin, has taken a look at deflation. It warns of the danger of demonising deflation: "It is useful to acknowledge that the adverse economic outcomes that often accompany deflationary episodes may not have been entirely caused by the experience of deflation itself but rather by the circumstances that caused inflation to fall into negative territory."

But it also warns of the risks of debt deflation and of the effect of falling prices being amplified by stickiness in money wages. The chapter from the bulletin is here.

The improvement in Britain's trade position that will result from sterling's fall is not happening yet; indeed the movement so far is arguably in the opposite direction, though some of this could be the "J-curve" effect. The latest figures show that the overall trade deficit widened from £3.2 billion to £3.6 billion between December and January, while the deficit in goods alone increased from £7.2 billion to £7.7 billion. More details here.

This is a bad time to be an exporter. China's exports in January were down by a huge 25.7% in February. Britain's exports, by comparison, showed a 10.3% volume fall in the three months to January compared with a year earlier, while imports were down by 12%.

As expected, the Bank of England's monetary policy committee announced a cut in Bank rate from 1% to a new low of 0.5% and signalled its intention to proceed with quantitative easing. The exchange of letters between Mervyn King and Alistair Darling, can be accessed here and tells us quite a lot more about the parameters of the new policy.

This is quite a big moment for UK monetary policy, one that few would have considered likely even a few months ago. We are getting, not just £75 billion of quantitative easing over the next three months as a result of the announcement today - mainly through gilt purchases - but the possibility of £150 billion in total, £50 billion of which is intended to fund the purchase of private sector assets. These are commercial paper, corporate bonds, syndicated loans and other private sector assets.

The £50 billion of credit easing intended via the asset purchase scheme, sterilised by issuance of treasury bills, has been suspended, so the APF will purely be used for £150 billion (the initial ceiling) of quantitative easing. This is pretty bold stuff, particularly by UK standards. The European Central Bank's rate cut from 2% to 1.5% looked like a bit of a sideshow by comparison.

These things can work, though the evidence will have to be assessed carefully. There is a lot of noise in the broad money (M4) figures and in the bank lending numbers, as a result of the amount of lending still being channelled in to the troubled financial sector. The big requirement is for a return of underlying lending to something like normal levels.

This is the Bank of England's statement:

"The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.5 percentage points to 0.5%, and to undertake a programme of asset purchases of £75 billion financed by the issuance of central bank reserves.

World activity continued to weaken, reflecting both depressed confidence and the persistent problems in international credit markets. In the United Kingdom, output dropped sharply in the fourth quarter of 2008. That reflected lower consumer spending, a further fall in business investment and a rapid run-down in stocks, in part offset by stronger net exports as the past depreciation of sterling began to take effect. Business surveys continue to point to a similar rate of contraction in the early part of this year. Unemployment has risen markedly. Credit conditions faced by companies and households remain tight.

CPI inflation declined to 3.0% in January. The depreciation of sterling is adding to imported cost pressures, but pay pressures continue to wane. Inflation is likely to fall below the 2% target by the second half of the year, reflecting diminishing contributions from retail energy and food prices and the impact of the temporary reduction in Value Added Tax.

At its March meeting, the Committee noted that the February Inflation Report had implied a substantial risk of undershooting the 2% CPI inflation target in the medium term and that a further easing in monetary policy was likely to be needed. Data released since the finalisation of the Report had not materially altered that prospect. Accordingly, the Committee concluded that a further easing in the stance of monetary policy was warranted. But the Committee also noted that a very low level of Bank Rate could have counter-productive effects on the operation of some financial markets and on the lending capacity of the banking system. On balance, the Committee decided to reduce Bank Rate by 0.5 percentage points, to 0.5%.

The Committee judged that this reduction in Bank Rate would by itself still leave a substantial risk of undershooting the 2% CPI inflation target in the medium term. Accordingly, the Committee also resolved to undertake further monetary actions, with the aim of boosting the supply of money and credit and thus raising the rate of growth of nominal spending to a level consistent with meeting the inflation target in the medium term.

To that end, and noting the recent exchange of letters between the Governor and the Chancellor of the Exchequer concerning the use of the Asset Purchase Facility for monetary policy purposes, the Committee agreed that the Bank should, in the first instance, finance £75 billion of asset purchases by the issuance of central bank reserves. The Committee recognised that it might take up to three months to carry out this programme of purchases. Part of that sum would finance the Bank of England’s programme of private sector asset purchases through the Asset Purchase Facility, intended to improve the functioning of corporate credit markets. But in order to meet the Committee’s objective of total purchases of £75 billion, the Bank would also buy medium- and long-maturity conventional gilts in the secondary market. It is likely that the majority of the overall purchases by value over the next three months will be of gilts.

At its future meetings, the Committee will monitor the effectiveness of this purchase programme in boosting the supply of money and credit and in due course raising the rate of growth of nominal spending, adjusting the speed and scale of purchases as appropriate.

The minutes of the meeting will be published at 9.30am on Wednesday 18 March."

Clearing up the banking mess is proving to be a lengthy and potentially expensive process. This morning the Treasury announced another £13 billion capital injection into Royal Bank of Scotland (after it announced a £24 billion loss for 2008), together with taking £325 billion of the bank's assets under the new Asset Protection Scheme.

The £325 billion is larger than expected and the capital injection was not generally expected. It could have taken the government's RBS stake up to 84% but the Treasury has decided to take it in non-voting shares. This story has a long way to run. Here is Alistair Darling's statement.

Britain's gross domestic product fell by 1.5% in the final quarter of 2008, unchanged on initial estimates. GDP was down by 1.9% on the corresponding period of 2007 although, because of the strength of the economy earlier in the year, calendar 2008 saw a 0.7% gain on 2007.

Within the figures, consumer spending fell by 0.7% in the fourth quarter and net trade made a small contribution to growth, with exports falling at a marginally slower rate than imports. The eyecatching figure, however, was the big drop in inventories, £2.6 billion at 2003 prices, without which the Q4 GDP decline would have been very much smaller. That bodes well for the prospect of smaller GDP declines in the coming quarters. More details here.

So now it is official, we have a state-owned mortgage lender seeking to increase its market share rather than run down its mortgage book. That has to make sense; it was always ridiculous for Northern Rock to be draining large amounts out of a funding-constrained mortgage market. The decision to get NR lending again will make quite a difference to net lending. Here's the Treasury's announcement.

A few days away without internet access, and what do you find? The Office for National Statistics is about to add between 70% and 100% of GDP to public sector debt because of the government's rescue of RBS and the Lloyds Banking Group. This is the ONS announcement, which should properly be read in conjunction with the regular release on January's public finances, here.

This shows that without the "financial sector interventions" public sector net debt would be a very acceptable 40.4% of GDP, which is the number the Treasury would like us to focus on. Perhaps we should, because we won't see its like again for a very long time.

Inflation fell, though not quite as much as expected. CPI inflation dropped from 3.1% to 3%, while RPI inflation, helped by falling house prices and mortgage rates, dropped from 0.9% to just 0.1%, its lowest since 1960. Retail discounts in January were less dramatic than expected, so "core" inflation measures edged up. More details on www.statistics.gov.uk.

RPI inflation will go negative next month. CPI inflation is, however, proving to be a little more sticky on the way down.

Euro zone GDP figures for the fourth quarter added a little to the "Who's suffering the worst recession?" debate. For euroland as a whole, the fourth quarter drop in GDP was 1.5%, the same as in Britain. Both Germany, down 2.1%, and Italy, off by 1.8%, suffered bigger slides.

This is clearly a serious recession for Europe, certainly the worst since the euro came into being, and almost certainly the worst since the second world war. More details here.

In its quarterly inflation report the Bank of England predicted a deeper recession than three months ago - and a much deeper one than in August last year - alongside an extended period of below-target inflation. Mervyn King, the governor, said: "The UK economy is deep recession", while insisting that policy had "responded vigorously to that prospect".

Much of the discussion at the press briefing was about "unconventional" monetary policy measures. The view that the Bank was cool about quantitative easing appears to have been wrong. This week it will embark on credit easing through the £50 billion asset purchase facility. QE will follow quickly, it seems, and does not have to wait for Bank rate to go to zero. The report is here

Tim Geithner, the US Treasury Secretary, did not underplay his first big announcement, describing it as The Financial Stability Plan: Deploying our Full Arsenal to Attack the Credit Crisis on All Fronts. It included a joint public-private-sector fund to buy up to $1 trillion of illiquid assets and a $1 trillion program to supply new credit to consumers and businesses.

The markets, initially at least, were unimpressed, the Dow closing down by nearly 400 points. As with last month's UK toxic asset proposals, investors wanted more detail and bank shares dropped. Geithner's statement is here, and the links will take you to further details of the plan.

Manufacturing output slumped again in December, falling by 2.2% on the month and by 10.2% on a year earlier. Total industrial production fell 1.7% and 9.4% respectively. The carnage in industrial production is a global phenomenon, but that is of small comfort. More details here.

Meanwhile, we are still waiting for deflation in the producer price data, partly because of the weakness of sterling. Overall output prices rose by 0.1% between December and January and the 'core' rate was up 0.4%. Output prices were 3.5% up on a year earlier. Input prices rose by 1.5% in January, for an increase of 2.3% on a year earlier. More here.

The Bank of England's monetary policy committee cut Bank rate from 1.5% to 1%, as widely expected. There was more of a debate about this that previous reductions, which will make next week's inflation report and future decisions interesting. Meanwhile, the Halifax reported what looks like an aberrational 1.9% rise in house prices for January.

Here is the Bank's statement:

"The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.5 percentage points to 1.0%.

"The global economy is in the throes of a severe and synchronised downturn. Output in the advanced economies fell sharply in the fourth quarter of 2008, and growth in the emerging market economies appears to have slowed markedly. Business and household sentiment in many countries has deteriorated. The weakness of the global banking and financial system means that the supply of credit remains constrained.

"In the United Kingdom, output dropped sharply in the fourth quarter of 2008 and business surveys point to a similar rate of decline in the early part of this year. Credit conditions faced by companies and households have tightened further. The underlying picture for consumer spending appears weak. Businesses have responded to the worsening outlook by running down inventories, cutting production, scaling back investment plans and shedding labour. The Committee welcomed the Government’s latest measures to tackle the problems in the banking system, including the creation of an Asset Purchase Facility to buy high-quality corporate debt and similar assets.

"CPI inflation fell to 3.1% in December. Pay pressures have diminished. But sterling has continued to depreciate, boosting the cost of imports. Inflation is expected to fall to below the 2% target by the second half of the year, reflecting waning contributions from retail energy and food prices and the direct impact of the temporary reduction in Value Added Tax. But the impact of changes in the rate of Value Added Tax, and the gradual pass-through of the depreciation in sterling, mean the path may be somewhat volatile.

"At its February meeting, the Committee noted that, although the transmission mechanism of monetary policy was impaired, the past cuts in Bank Rate would in due course nevertheless have a significant impact. Together with the recent easing in fiscal policy, the substantial fall in sterling and past falls in commodity prices, that would provide a considerable stimulus to activity as the year progressed. Nevertheless, the Committee judged that there remained a substantial risk of undershooting the 2% CPI inflation target in the medium term at the existing level of Bank Rate. Accordingly, the Committee concluded that a further reduction in Bank Rate of 0.5 percentage points to 1.0% was warranted this month.

"The Committee’s latest inflation and output projections will appear in the Inflation Report to be published on Wednesday 11 February.

"The minutes of the meeting will be published at 9.30am on Wednesday 18 February."

The Bank of England has provided details of how its special liquidity scheme (SLS), introduced in April 2008 and now replaced by other assistance for the system, has worked. Originally it was thought the Bank would provide around £50 billion of liquidity under the scheme, then Alistair Darling encouraged the idea of a larger number, perhaps £100 billion or more.

In the event, as an announcement from the Bank makes clear, £185 billion was lent under the scheme to 32 banks and building societies, against £287 billion of collateral, mainly in mortgage-backed securities, now valued by the Bank at £242 billion. These are big numbers and underline how desperate the banks were.

The Bank's notice also gives details of the "haircuts" applied in the operation of the scheme - how much the banks had to accept in reductions in the value of their collateral. And, it warns: During the remaining life of the Scheme the Bank will continue to call for margin should the haircut-adjusted value of the collateral fall relative to the value of Treasury bills lent." Taxpayers' interests, in other words, are being safeguarded.

The International Monetary Fund has been revising its forecasts every other month and it has been downhill all the way. The latest projects the worst outlook for the world economy since the Second World War, with growth of just 0.5%. To remind you, its conventional definition of a global recession is growth of below 2%, which rarely happens because global downturns are rarely this co-ordinated.

It predicts a 2.8% decline for the UK this year, just about the biggest in the G7, though hardest hit appear to be the newly industrialised Asian economies, Singapore and so on, projected to decline by 3.9%, not to mention the Irelands and Icelands. More details here.

Meanwhile, the Institute for Fiscal Studies published its annual green budget. It thinks taxes will have to rise or spending be cut by an additional £20 billion on top of the pre-budget report tightening but that it will still take 20 years to get back down to pre-crisis levels of public sector debt as a share of GDP - under 40%. Perhaps 60% is the new 40%. Its press release, together with access to the full report, is here.

The preliminary estimate of gross domestic product confirmed that the UK economy is officially in recession, with a decline of 1.5% in the fourth quarter after an unrevised 0.6% drop in the third. This was the biggest fall since 1980, with manufacturing alone estimated to have declined by 4.6%. One unexpected drag on the economy was government spending, which fell by 0.5% and helped drag down service-sector output. That may be reversed in the current quarter. Full details here.

In contrast to the GDP figures, retail sales were officially estimated to have risen by 1.6% in December and to have been up by 3.7% on a year earlier. But the figures, detailed here, are full of caveats. The value of retail sales, for example, which is what concerns retailers, was down in December compared with a year earlier.

Claimant unemployment rose by 77,900 to 1.16m last month, close to the consensus expectation of an 80,000 rise, though given the spate of gloomy news nobody would have been surprised by 100,000. The rise in the Labour Force Survey measure was 131,000 in the three months to November to 1.923m, or 6.1% of the workforce. It was accompanied by a drop in employment of 26,000. Neither number was as bad as it might have been though this was before the real winter woes kicked in. Here are the details.

The Bank of England, meanwhile, voted 8-1 to cut Bank rate from 2% to 1.5% earlier this month, with the one vote against being David "Danny" Blanchflower, who preferred a full-point reduction. The minutes are here.

Finally, data for the public finances for December were very weak, with a current budget deficit of £11.4 billion and net borrowing of £14.9 billion. On the face of it, even the chancellor's November forecasts will be badly missed. The public finances normally improve in the final three months of the fiscal year. They need to. More here.

Following Monday's banking package, Mervyn King gave a major speech on the economy in Nottingham on Tuesday night, There is a touch of the Donald Rumsfeld about some of the Bank governor's comments: he refers to "conventional unconventional" as well as "unconventional unconventional" measures, but the message of his speech is that the Bank is readying itself for these, not immediately but soon.

This is one key passage: "The disruption to the banking system has impaired the effectiveness of our conventional interest rate instrument. And with Bank Rate already at its lowest level in the Bank’s history, it is sensible for the MPC to prepare for the possibility – and I stress that we are not there yet – that it may need to move beyond the conventional instrument of Bank Rate and consider a range of unconventional measures. They would take the form of purchases by the Bank of England of a range of financial assets in order to expand the amount of reserves held by commercial banks and to increase the availability of credit to companies. That should encourage the banking system to expand the supply of broad money by lending to the private sector and also help companies to raise finance from capital markets."

King's view of the economy, and inflation, is downbeat, at least for the first half of the year. But he remains confident that policy action will work: "No one can know at what point the impact of all this stimulus will have a visible effect on activity; the lags in economic policy are notoriously long and unpredictable. But well-designed policies implemented within a consistent policy framework will eventually work." The speech is here

Inflation dropped last month, as expected, but hopes of a fall in consumer price inflation below 3% were not met; instead it fell from 4.1% in November to 3.1% last month. Though petrol prices fell and much of the Vat cut was passed on, food-price inflation remained in double figures.

The most eye-catching number, however, was for retail price inflation, which slumped from 3% to just 0.9% under the impact of lower mortgage rates. Even excluding mortgages rates, the RPIX measure dropped from 3.9% to 2.8%, close to its old 2.5% target. More details here.

Phase 2 of the official effort to ringfence bank losses and stimulate lending has been unveiled. It comes in three main parts, an asset protection scheme; a conversion of the RBS preference shares in ordinary shares, thereby increasing the government's stage in this lossmaking bank, outlined here; and official guarantees for new asset-backed securities.

There's plenty there. Whether it will work, or stave off the full nationalisation of the banks, remains to be seen. Two things will be seen as particularly positive for the housing market - a chance to get some wholesale funding going and the end of the policy of Northern Rock running down its mortgage book. With the approval of Brussels, it will start to become a net lender again.

A rather good speech by Sir john Gieve, deputy governor of the Bank of England, analysing the crisis, talking about the extent of the policy response but warning that not only was the fourth quarter very bad but the first quarter will be too. The Great Stability, he says, came to a shuddering halt and, for once, conventional boom did not precede the bust. The speech is here.

The European Central Bank, as expected, cut its key lending rate from 2.5% to 2%. Jean-Claude Trichet's press conference, the webcast of which will be on the ECB's website, is always worth watching.

Another milestone for China, with revised official figures showing growth in 2007 was a staggering 13% (up from 11.9%) and that, as a result, China overtook Germany to become the world's third largest economy, after America and Japan. Here's the BBC's report.

Today's announcement of £10 billion of working capital support, together with other measures, came from Lord Mandelson, the business secretary, and is outlined here. That suggests bigger measures are still in the pipeline from the Treasury and/or Downing Street. They may include government guarantees for the issue of new asset-backed securities and the creation of a "bad bank" to take toxic debt off the banks' books.

This is a bad time to be making things. UK manufacturing output slumped by 2.9% in November and was down by more than 7% on a year earlier. Overall industrial production fell by 2.3% on the month. In the latest three months manufacturing output fell by 3.3% and was down by 5.2% on the corresponding period a year earlier. The downturn in manufacturing is a worldwide phenomenon. There is, however, scant comfort in that. More details here.

Meanwhile, the FT-Acadametrics house price index, which I regard as the best overall measure, showed a drop of 1.8% in December and was down by 10.4% on a year earlier.

The Bank of England's monetary policy committee (MPC) has made history by cutting Bank rate from 2% to 1.5%, the lowest level since 1694. There were widespread calls for a full-point reduction but this probably made sense, not least to leave some shots in the locker ahead of other measures, including quantitative easing.

This is its statement:

"The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.5 percentage points to 1.5%.

"The world economy appears to be undergoing an unusually sharp and synchronised downturn. Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time.

"In the United Kingdom, business surveys suggest that the pace of contraction in activity increased during the fourth quarter of 2008 and that output is likely to continue to fall sharply during the first part of this year. Surveys of retailers and reports from the Bank’s regional Agents imply that consumer spending has weakened. The outlook for business and residential investment has deteriorated. And the availability of credit to both households and businesses has tightened further, pointing to the need for further measures to increase the flow of lending to the non-financial sector. But the substantial depreciation in sterling over recent months may help to moderate the impact on UK net exports of the slowdown in global growth.

"CPI inflation fell to 4.1% in November. Inflation is expected to fall further, reflecting waning contributions from retail energy and food prices and the direct impact of the temporary reduction in Value Added Tax. Measures of inflation expectations have come down. And pay growth remains subdued. But the depreciation in sterling will boost the cost of imports.

"At its January meeting, the Committee noted that the recent easing in monetary and fiscal policy, the substantial fall in sterling and the prospective decline in inflation would together provide a considerable stimulus to activity as the year progressed. Nevertheless, the Committee judged that, looking through the volatility in inflation associated with the movements in Value Added Tax, there remained a significant risk of undershooting the 2% CPI inflation target in the medium term at the existing level of Bank Rate. Accordingly, the Committee concluded that a further reduction in Bank Rate of 0.5 percentage points to 1.5% was necessary to meet the target in the medium term.

The minutes of the meeting will be published at 9.30am on Wednesday 21 January."

Sir Alan Walters, who died at the weekend aged 82, had a considerable influence on UK economic policy over two decades. In the early 1970s, along with David Laidler, he warned that runaway growth in the money supply would lead to a great inflation in the UK. At the time such views were deeply unfashionable, but he was right.

In the early 1980s, as Margaret Thatcher's personal economic adviser, he helped frame the austerity budget of 1981, having earlier pointed out the shortcomings of the government's monetarist experiment. He advised that policy in 1980 was far tighter than necessary. In the late 1980s, when he returned in that role, he attacked the folly of shadowing the D-mark by Nigel Lawson.

I had many dealings with him over the years. He was sharp, bright and modest and always a pleasure to talk to.

Olivier Blanchard, the IMF's chief economist, is the latest to criticise the government's temporary VAT cut. "Temporarily cutting VAT, a measure that was adopted in Great Britain, does not seem to me to be a good idea - 2% less is not perceived by consumers as a real incentive to spend," he said in an interview with Le Monde.

This is something of a bugbear of mine and, far be it of me to say the IMF's chief economist does not know how tax cuts work, but surely that's too simplistic? The effect, as with all tax cuts, is cumulative and it is also a significant fiscal transfer from the government to the private sector. There may have been better ways of cutting tax, but it is still a tax cut.

For the record, this was the Treasury said in the pre-budget report: "Consumer spending is forecast to decline in 2009, reflecting various factors. Apprehension over labour market prospects and increased saving from the very low level of 2008 are likely to put downward pressure on consumer spending. The temporary cut in the rate of VAT, by boosting real purchasing power as it is passed through to lower prices and by incentivising purchases before the lower rate reverses, is expected to increase the volume of spending relative to the level that would have prevailed in the absence of such a cut. The forecast assumes that around half of the increase in real purchasing power will feed through to an increased volume of spending and half to the adjustment of household finances."

Finally, two sets of figures. GDP fell by 0.6% in the third quarter and is heading for a bigger fall in the fourth. More here. But the current account deficit, while up slightly in the third quarter, appears to be trending down fast. One of the economy's imbalances may be on the mend. More here. Interestingly, last year's deficit has been revised down from £52.6 billion to £39.5 billion.

The Bank of England's December minutes showed a 9-0 vote in favour of cutting Bank rate from 3% to 2%, as expected, and analysts have concluded that the discussion was consistent with the monetary policy committee (MPC) following the Fed by cutting rates all the way down to zero. They may be right, though there are one or two notes of caution in there.

The Bank was concerned to avoid an "excessive" fall in sterling, and "the Committee agreed that Bank Rate was not the right policy instrument to tackle supply constraints in the credit market. Further measures to underpin lending growth would be needed." On the decision to cut, the minutes say: "A cut of 100 basis points would mean that the level of Bank Rate would have been reduced from 5% to 2% in just 8 weeks; given the uncertainty inherent in the transmission mechanism, it was difficult to be certain that rates needed to be cut by more or faster than that." The minutes are here

The jobless figures were, as expected, gloomy, with the claimant count climbing above 1m, to 1.07m, after a big rise of 75,700 in November. The Labour Force Survey measure rose, if anything, somewhat less than expected, climbing by 137,000 in the three months to October to 1.86m. More here.

A big moment. The Federal Reserve, having been expected to cut the Fed Funds rate from 1% to 0.5%, went even further, effectively cutting to zero (0% to 0.25%). It signalled that this exceptionally low rate was likely to last "for some time" and that it would undertake unconventional measures such as buying debt, printing money in the vernacular. This is its statement.

The fall in consumer price inflation was slightly less than expected, consumer price inflation dropping from 4.5% to 4.1%, against expectations of a drop below 4%. Retail price inflation fell more dramatically, from 4.2% to 3%, reflecting the sharp drop in mortgage interest rates. RPIX, down from 4.7% to 3.9%, is closer to its old target (2.5%) than CPI is to 2%.

Core CPI inflation, excluding food, alcohol, tobacco and energy, edged up from 1.9% to 2%, suggesting genuine deflation is still some way off. More details here. In his letter to the chancellor, reproduced rather badly, Mervyn King talks about the balancing effects of falling commodity prices and a weak pound. He thinks this might be the last letter he has to write to explain the overshoot, and that the next might be to justify an undershoot below 1%.

David "Danny" Blanchflower, who has said he will not be seeking a second term on the Bank of England's monetary policy committee (MPC), once said that the Bank governor will have to write a letter explaining why inflation is too low - below 1% - before he, Blanchflower, leaves the MPC. He leaves at the end of May and inflation is already falling fast. He may well be right.

Today's inflation attitudes survey from the Bank shows that expectations have come down sharply. Median expectations for the next 12 months have dropped from 4.4% in August to 2.8% now. Even that looks a bit high. Details here.

The Bank's other big announcement was that Paul Tucker will replace Sir John Gieve as deputy governor with responsibility for financial stability. A good appointment; anything else would have been a surprise. The announcement is here.

Manufacturing output was very weak in October, getting the fourth quarter off to a very bad start and suggesting the GDP fall in the final three months of the year will be of the order of 1%, from 0.5% in the third quarter. Sterling's fall is not doing much to protect industry from a very sharp slide in activity. More details here.

Andrew Sentance of the Bank of England's monetary policy committee discusses the recession in a rather interesting speech: The Current Downturn - A Bust Without a Boom?, available here.

Amid all the talk of deflation, the latest producer price numbers were interesting. While very weak, this is mainly an oil story. "Core" producer output prices excluding food, energy, etc., actually rose by 0.2% on the month in November and are still up by 5.1% on a year earlier, which was a slight increase on October's 5%. Details here.

Another week, another point off Bank rate, coupled with a 0.75 point cut by the European Central Bank. The dive in official interest rates towards zero is an extraordinary facet of an extraordinary time.

After a cascade of bad news, notably very weak purchasing managers' surveys for manufacturing, construction and services, the Bank had no option but to go for another cut that only a few weeks ago would have been regarded as unthinkable.

Activity is sliding fast everywhere, and certainly in all advanced economies. The OECD reckons the fourth quarter will see the biggest gross-domestic-product declines in this recession (Britain contracted by 0.5% in the third) and it feels that way. Much depends on when policy actions, including aggressive rate cuts, start to have an impact.

Members of the Bank's monetary policy committee (MPC), having taken these dramatic steps, are feeling a bit misunderstood. They think people do not appreciate the pressures they were under until recently to balance rising inflation — and people's heightened expectations of future inflation — and recession.

And, while I would have liked to see them cut aggressively much sooner, they have a point. In August, before the near-meltdown in the global banking system that started with Lehman Brothers' bankruptcy in mid-September, only two forecasters out of 44 monitored by the Treasury were predicting outright recession in 2009. They were Standard Chartered and Peter Warburton's Economic Perspectives.

The consensus among forecasters was that Bank rate would remain at 5% until the end of the year, falling only gradually to 4.25% by the end of 2009. Inflation would remain above the 2% target throughout. Things have changed, and they have changed dramatically.

We know about the damage this most deadly phase of the financial crisis has inflicted on growth and confidence. It has also transformed inflation prospects, and one useful measure of this is the oil price. In August, economists expected the price to average $115 a barrel in 2009. It had come down from its July record of $147 but most did not expect it to come down much more. Last week Brent crude dropped below $40, a figure that seems strangely familiar.

The oil price and I go back a long way. Having repeatedly said the price rise was a spike, significantly driven by speculation, I found myself at odds with many apparent experts and many readers.

T Boone Pickens, the legendary US energy investor, said oil would never again go below $100 a barrel and his view was echoed by many lesser lights. Some journalists went out of their way to deny a speculative element in the spike, even as some investment banks continued to pump up the oil story and funds poured into commodity-index futures. Arjun Murti, Goldman Sachs's energy strategist, said the price could reach $200 in the second half of this year and plenty of rival banks pushed the rising oil story. Jeff Rubin, chief economist at CIBC World Markets, was also a $200 man.

Peak-oil enthusiasts explained every price rise as further evidence that global production had reached its maximum. Weekly rags spouted "sell your house, buy commodities" nonsense. I hope nobody did.

The more the financial crisis dragged on, at least until the September-October tumult, the more oil bulls became certain the price of crude would continue to rise. That seemed illogical to me. Even before the latest banking troubles the world economy was heading into a period of slower growth and restricted oil demand.

That did not stop the vested interests, like Chakib Khelil, the Opec president, who predicted a rise to $170 this year, or Alexei Miller, chief executive of Gazprom, who summoned journalists to an awayday in Deauville to say the price would hit $250 "in the foreseeable future".

We have to be thankful they were wrong, though not before such views, in helping to drive the oil price higher, did a lot of damage. The scale of the market turbulence and intense banking strains of recent weeks took everybody by surprise and hastened the fall in the oil price because some investors were forced to unwind their speculative positions. But its main effect was to bring forward the inevitable.

In the short term, then, this is unalloyed good news. The full-year effect of a sustained oil drop from nearly $150 to $40 a barrel is, according to Mark Cliffe, global head of financial-market research at ING, a $2,700 billion transfer from producing to consuming countries. This is a tax cut much bigger than the one western governments are implementing.

More directly, the oil fall has liberated the Bank, and other central banks, in spectacular fashion. The mainstream view now is that retail-price inflation will go negative during 2009 and consumer-price inflation will skate close to zero.

Will it go below zero and, in a recessionary environment, usher in a long and potentially devastating period of deflation — a falling price level? The danger of that is not that people delay purchases in anticipation of further price falls; that is an everyday story on the high street. It is that debt, already at high levels, becomes even more burdensome by rising in real terms.

The Treasury, which sees consumer-price inflation falling to 0.5% by the end of next year, thinks it will then bounce. "Inflation is forecast to move a little above the 2% target following the reversal of the Vat cut and as the lagged effects of sterling depreciation on import prices continue to feed through," it said in the pre-budget report.

Part of the path of inflation, however, is dependent on oil. After previous recessions the oil hangover was long. In the mid-1980s and 1998 the price touched $10 a barrel as demand took time to recover.

The medium-term supply-demand balance for oil should be tight enough to avoid that happening again and, indeed, it would not be a good thing if it did. Already weak oil prices and funding shortages are scaling back exploration and development.

The appropriate price of oil is one that encourages marginal fields to be brought on stream. If it falls too far below present levels, says the International Energy Agency, we will be storing up supply problems for the future by discouraging development.

The fall in the oil price is a good thing. Like many good things, however, you can have too much of it.

PS: As a paid-up member of what George Magnus calls the "boomerangst" generation — baby-boomers worried about their retirement — I have been reading his book, The Age of Aging (Wiley, £17.99) with interest.

We will all, it seems, have to work longer. That's easy to think about when the job market is strong. In a recession the opposite is likely to occur.

From The Sunday Times, December 7 2008

The Bank of England's monetary policy committee cut Bank rate from 3% to 2%, making this the lowest Bank rate since 1951. Wow. This is its statement:

The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 1.0 percentage points to 2.0%.

In the United Kingdom, business surveys have weakened further and suggest that the downturn has gathered pace. Consumer spending and business investment have stalled, while residential investment has continued to fall. Activity indicators in the rest of the world have also weakened, though the further depreciation in sterling should moderate the impact of weaker global growth on the United Kingdom. And a number of fiscal measures to boost near-term demand are in train, both in the United Kingdom and overseas. Despite the actions taken to raise bank capital, ease funding and improve liquidity, conditions in money and credit markets remain extremely difficult. The Committee noted that it was unlikely that a normal volume of lending would be restored without further measures.

CPI inflation decreased to 4.5% in October. Cost pressures have also eased. Commodity prices continued to fall back. Pay growth remained subdued. And measures of inflation expectations fell back sharply. CPI inflation is likely to continue to drop back as the contributions from retail energy and food prices decline. The direct effect of the temporary reduction in Value Added Tax will also lower CPI inflation through much of next year, with a corresponding increase in inflation in 2010.

In the November Inflation Report, the Committee’s projection for inflation showed a substantial risk of undershooting the 2% CPI inflation target in the medium term. The subsequent decline in market interest rates and the further depreciation in sterling have raised the profile for inflation since then. But the weaker outlook for activity in the near term and the further falls in commodity prices have lowered that profile. Although the temporary reduction in Value Added Tax will lead to some volatility in inflation over the next two years, the new fiscal plans are unlikely to have a significant effect on inflation beyond that horizon.

At its December meeting, the Committee judged that, at the existing level of Bank Rate and looking through the volatility in inflation associated with the movements in Value Added Tax, there remained a substantial risk of undershooting the 2% CPI inflation target in the medium term. Accordingly, the Committee determined that a further reduction in Bank Rate of 1.0 percentage points to 2.0% was necessary in order to meet the target in the medium term.

The minutes of the meeting will be published at 9.30am on Wednesday 17 December.

There are many stories in today’s pre-budget report but let me, as an initial reaction, concentrate on just two. The first is the deterioriation in the public finances and the second is the impact of Alistair Darling’s discretionary action, both in the short and medium-term.

The most striking number in the pre-budget report is for next year’s public sector net borrowing. In March the Treasury expected £38 billion of borrowing for 2009-10; now it expects £118 billion, more than three times the level.

An upward revision of £80 billion in the space of eight months is going some, even after everything that has happened in the past few months, and even taking into account the Treasury’s shaky forecasting record in this area.

That number was, at least, in the market. The figures for future years will, if anything, have come as a bigger shock. After £77.6 billion this year and that £118 billion next, the numbers for the following three years are £105 billion, £87 billion and £70 billion respectively.

Those who follow these things will have added up the numbers and worked out that, compared with what the Treasury expected in the March budget, borrowing over five years will be £295 billion higher. Just the addition to borrowing averages roughly twice as much as the government should be borrowing to meet its now “temporarily” abandoned fiscal rules.

The public sector’s net debt, meanwhile, will go from 36.3% of gross domestic product at the end of March to 57.4% by 2013-14. That excludes the cost of the government’s banking rescues, whatever they turn out to be in the medium-term. There has been a lot of talk of historical parallels but in debt terms, this really is back to the 1970s.

Interestingly, very little of this extra borrowing and debt has much to do with Darling’s emergency fiscal package, even in the short-term. The package is worth £20 billion, with about four-fifths of that coming through in the 2009-10 fiscal year. Even then, however, that is only worth 1.1% of GDP.

To put that in perspective, government borrowing is predicted to increase from 2.6% of GDP last year to 8% in 2009-10 (via 5.3% this year). Without the package it would still have risen to 6.9% of GDP, slightly more than £100 billion.

What about the economics of this? Every radio and television discussion has been dominated by the question: Will a 2.5 percentage point cut in Vat make any difference to people’s spending decisions? To paraphrase Nick Clegg, the Liberal Democrat leader: Will a modest price cut make you buy that flat screen TV?

With apologies to him, this is a dumb way of looking at it. The effect of the Vat cut, if there is one, is cumulative. Along with sharply falling inflation, it will mean, according to the Treasury, that real household disposable income growth stays positive next year, if only by 0.5% to 1%. That is still consistent, it believes, with a fall in consumer spending of 1% or more, and a rise in the saving ratio.

The Treasury’s forecast of a 0.75% to 1.25% drop in GDP next year is broadly in line with the latest independent consensus (which is for a 0.9% drop) and its prediction of a bounceback in 2010 is in line with the Bank of England.

Long after that, however, we will be stuck, barring miracles, with these huge borrowing numbers. Higher rate taxpayers will be paying £2 billion a year more in various forms from 2011-12. Higher National Insurance contributions will be brining in £5 billion a year and rising from employers and employees from that same year.

We expected a hangover. What was staggering about today was how big the fiscal hangover will be and how long it will last. 2015-16, when the current budget is now expected to be back in balance, is a very long way away.

Timothy Geithner has been confirmed as the next US Treasury secretary, anticipation of which helped Wall Street to a huge gain on Friday. The appointment of somebody with close knowledge of the markets and the banking system is regraded as a significant plus. This is a brief biography.

Meanwhile, Charlie Bean, deputy governor of the Bank of England, said the causes of the current crisis reflected past monetary looseness in the world's big deficit country, America, but also policies in one of the world's biggest surplus countries, China. He maintained that there was very little the Bank could have done through monetary policy to constrain the UK housing boom. His speech is here.

Expectations had been for a very gloomy set of official retail sales figures but, in the event, the official numbers showed a drop of only 0.1%. Food sales were up by by 1%, non-food sales down by 1.1%, In the latest three months overall sales were flat, but up by 2.2% on a year earlier. Details here. The public borrowing figures, as expected, were poor. They are here.

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The most dovish set of minutes in the monetary policy committee's history. Not only did the MPC vote 9-0 for this month's cut in Bank rate from 4.5% to 3% but it also contemplated a bigger reduction of more than two percentage points. Further rate cuts are on the way, as the minutes clearly signal. They are available here.

The drop in consumer price inflation was bigger than analysts had expected, with the headline rate falling from 5.2% to 4.5% and even the "core" rate, excluding food, drink, tobacco and energy, dropping from 2.2% to 1.9%. Mervyn King has some more open letters to write, but probably not that many, at least not until inflation drops below 1%. RPI inflation fell from 5% to 4.2% and may be heading into negative territory. More details here.

Figures from Eurostat showed that eurozone gross domestic product declined by 0.2% in the third quarter, following a similar drop in the second, confirming that the single currency area is in recession. Most countries have not yet released their third quarter data but Italy, down 0.5% after a fall of 0.4% in the second quarter, and Germany, also down 0.4% and 0.5%, have. France grew by 0.1% in the third quarter and has so far escaped technical recession. More details here.

The Bank of England attracted some well-aimed criticism this morning for its inflation report predictions, which now rank among the gloomiest among economists, having been among the most optimistic. The Bank has had what appears to be the opposite of a Damascene conversion over the past three months to the seriousness of the credit crisis, and now thinks the economy is heading for a big recession, albeit a short, sharp one, and that the inflation problem will be one of undershooting - even deflation - not overshooting. A fascinating inflation report, available here, where you can also watch the webcast of the press conference.

Also today, unemployment figures showed a 36,500 rise in the claimant count last month and a 140,000 rise in the Labour Force Survey measure of unemployment over the July-September period. Bad, though not quite as bad as feared. Details here.

Producer price figures confirmed that a sharp fall in inflation is in the pipeline, with "core" output price inflation dropping below 5% and industry's input price inflation dropping from 24% to 13.8% in a month. More details here. Of more significance, ahead of the weekend G20 meeting in Washington, is that China has announced a fiscal stimulus worth around $570 billion. Huge. Here is the Xinhua news agency report

Digging through the numbers following Thursday's unusually large rate cut from 4.5% to 3%, a few interesting things emerge:

Bank rate was cut to its lowest level since 1955, when Britain had just come off rationing and when three-quarters of the population was not born. It was the biggest single cut since 1981, when the Thatcher government was desperately trying to lift the economy out of its deepest recession in decades.

But there was another statistic which brought home how significant last week’s move was. There were only two occasions during the 20th century when the level of interest rates was slashed by a third. One was in August 1914, at the start of the Great War, the other was in September 1939, on the outbreak of the Second World War.

The last time Bank rate was cut from 4.5% to 3% in a single move, by the way, was in 1695.

Wow. If the aim of the Bank of England was to make people sit up and take notice, it succeeded. A full point cut was being demanded from business and the average City expectation was slightly less than that. So the reduction from 4.5% to 3% in Bank rate was stunningly bold. The European Central Bank confined itself to a half-point reduction to 3.25%.

Here is the Bank's statement:

"The past two months have seen a substantial downward shift in the prospects for inflation in the United Kingdom. There has been a very marked deterioration in the outlook for economic activity at home and abroad. Moreover, commodity prices have fallen sharply.

"Since mid-September, the global banking system has experienced its most serious disruption for almost a century. While the measures taken on bank capital, funding and liquidity in several countries, including our own, have begun to ease the situation, the availability of credit to households and businesses is likely to remain restricted for some time. As a consequence, money and credit conditions have tightened sharply. Equity prices have fallen substantially in many countries.

"In the United Kingdom, output fell sharply in the third quarter. Business surveys and reports by the Bank’s regional Agents point to continued severe contraction in the near term. Consumer spending has faltered in the face of a squeeze on household budgets and tighter credit. Residential investment has fallen sharply and the prospects for business investment have weakened. Economic conditions have also deteriorated in the UK’s main export markets.

"CPI inflation rose to 5.2% in September. The substantial rise since the beginning of the year largely reflects the impact of higher energy and food prices. But commodity prices have fallen sharply since mid-summer, with oil prices down by more than a half. Inflation should consequently soon drop back sharply, as the contribution from retail energy and food prices declines, notwithstanding the fall in sterling. Pay growth has remained subdued. And measures of inflation expectations have fallen back.

"Since the beginning of the year, the Committee has set Bank Rate to balance two risks to the inflation outlook. The downside risk was that a sharp slowdown in the economy, associated with weak real income growth and the tightening in the supply of credit, pulled inflation materially below the target. The upside risk was that above-target inflation persisted for a sustained period because of elevated inflation expectations. In recent weeks, the risks to inflation have shifted decisively to the downside. As a consequence, the Committee has revised down its projected outlook for inflation which, at prevailing market interest rates, contains a substantial risk of undershooting the inflation target. At its November meeting, the Committee therefore judged that a significant reduction in Bank Rate was necessary now in order to meet the 2% target for CPI inflation in the medium term, and accordingly lowered Bank Rate by 1.5 percentage points to 3.0%."

The data leading into the Bank of England's interest rate decision tomorrow is weak. Manufacturing output dropped by 0.8% in September and was down by 2.3% on a year earlier. Meanwhile, the purchasing managers' index for the service sector slumped to 42.4, the weakest since the survey began in 1996. The survey may have been affected by the extreme turbulence in financial markets but nevertheless points to another significant fall in gross domestic product in the fourth quarter. The manufacturing data is here.

There had been speculation that Alistair Darling would use the annual Mais lecture to unveil new fiscal rules. In the event he did not, promising to do so in the pre-budget report next month. Then, he said, the Treasury would set out clear plans to return to "sustainable public finances" in the medium term. In the meantime, he'll borrow.

He also rejected any change in the Bank of England's remit, while offering a broad hint that the monetary policy committee should have no qualms about cutting rates further while inflation is above target. The lecture is here.

A 1% interest rate got Alan Greenspan into trouble, being widely blamed - probably a bit too much - for stoking up the housing boom. But the Fed under Ben Bernanke is back there again, having cut by half a percentage point. In its statement the Federal Open Market Committee said:

"The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

"In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

"Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."

Britain's gross domestic product had been expected to drop by 0.2% or 0.3% in the third quarter but in the event fell by 0.5% and was only 0.3% higher than a year earlier. Manufacturing, down 1%, and construction, down 0.8%, have dropped again, after falling in the previous quarter. Service sector output fell by 0.4%, after rising marginally in the previous quarter. More details here of the first GDP fall since 1992.

Mervyn King, in an important speech, underlined how dangerous the financial crisis of the past few weeks was. "Not since the beginning of the First World War has our banking system been so close to collapse," he said. The Bank of England Governor is confident that the banking rescue will work but admits that it will not prevent recession.

"The combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand," he said. "Indeed, it now seems likely that the UK economy is entering a recession." The pound has tumbled in response to that sentence and the prospect of aggressive rate cuts. The speech is here

September's public borrowing figures, showing net borrowing of £8.1 billion and a cumulative April-September figure of £37.6 billion have attracted plenty of headlines. With six months of the fiscal year to go, Alistair Darling is already close to his £43 billion target. The question is whether the borrowing numbers will follow the usual "front-loading" pattern. The easiest thing with the public borrowing figures is to take the first six months and double it. Usually, that would also be the wrong thing to do.

In 2007-8, for example, net borrowing was £21.5 billion for the first six months and £35.8 billion for the full year. Scaling up, that would give a figure of £62.6 billion for 2008-9, based on the first six months. What we don't know is the extent to which the downturn/recession will affect that front-loading pattern.

Meanwhile, we have two figures for public sector net debt. Excluding Northern Rock is is a very respectable 37.9% of GDP. Including it, debt rises to 43.4% - still low but with other banking rescue effects to be added in.

Though the rise in the claimant count, 31,800 to 939,900, was slightly smaller in September than August, the trend is unmistakeably higher. The Labour Force Survey measure of unemployment rose by 164,000 to 1.79m over the June-August quarter as employment dropped by 122,000. A claimant count of 1m and an LFS unemployment level of 2m by the end of the year now look likely. Average earnings rose by 3.4%, their lowest for five years, confirming the lack of threat from this source. More details here.

The September inflation figures were again worst than expected, with consumer price inflation hitting a new high of 5.2%, well above Bank rate at 4.5%. The inflation rate rose from 4.7% in August. RPI inflation went up from 4.8% to 5%, which will provide a bonus for pensioners - the September figures are used for the annual uprating in April. Core inflation also edged up, from 2% to 2.2%. This should, however, be the worst of it. We are at or close to the peak. Details here.

Paul Krugman is better known to a wider public these days as a New York Times columnist and Bush critic (and latterly a fan of Gordon Brown's banking rescue plan) but he is a fine economist and has been awarded the Nobel prize in economics for his work on trade theory. This is a link to the Nobel site.

This is a rather good website on the global financial crisis, jointly run by Simon Johnson, ex chief economist at the IMF. It is called baseline scenario, available here.

The government's bail-out plan for the banks was last week just that, a plan. Now it has become a reality, with £37 billion of taxpayers' money going into RBS, whose chief executive Sir Fred Goodwin goes, HBOS and Lloyds TSB. Separately, Barclays in raising funds privately. Here is the Treasury's statement.

What is clear now is that every country of any size will need something like this plan - recapitalisation, liquidity and guarantees of bank lending - so the onus is on other EU countries to put Sunday's words into action. Initial market reaction has been favourable.

My commentary for Times Online:

If anybody was looking for proof that the banking crisis has worsened dangerously over the past four weeks, today's co-ordinated interest rates cuts from the world's central banks provide it.

A month ago, the Federal Reserve was seen as stuck at 2%, the European Central Bank was still making noises about raising rates and speeches from members of the Bank of England's monetary policy committee suggested they were as worried about inflation as recession.

Now all three have cut interest rates by half a point, along with the Canadian, Swedish and Swiss central banks. Even China joined in, proof that even it is not immune from the global slowdown.

Economic historians will note that this was only the second time in 11 years of independence that the Bank has given us an "inter-meeting" cut - reducing rates outside its normal schedule of meetings. The first was in the wake of the September 11 2001 attacks on America.

Historians will also look back to this week as one of the big, pivotal moments. A recession is now built into everybody's calculations. The task of this week has been to prevent that turning into something much nastier and to keep the banking system from collapsing.

The rate cut has to be seen in that context, signalling to individuals and businesses that, along with action they probably do not fully understand about recapitalising the banks and providing them with liquidity, the authorities are doing something directly to help them.

Seen in their entirety, this morning's moves are bold and far-reaching. The Bank, while it has not abandoned its concenrs about inflation, as its statement makes clear, has room to cut rates further as the economy slow and inflation comes down. A 3% Bank rate, called for by Vince Cable as an emergency measure now, is certainly a strong possibility next year.

Will it work? Halifax, which had been raising mortgage rates, says it will pass the half-point cut on. Price is one thing, however, but quantity is more important. The aim of today's package, and of the co-ordinated global rate cuts, is to get the credit and money markets moving again and so restore the normal lending flows vital for the proper functioning of the economy.

Given the fragile nature of the markets. and the recent speed of events, nobody can be sure this will be the result of today's moves. But things look better than they did 24 hours ago. Whether they'll look as good in 24 or 48 hours remains to be seen.

More drama. The Bank of England's monetary policy committee (MPC) has cut rates by half a point from 5% to 4.5%. The Fed - down to 1.5% - European Central Bank, Bank of Canada and the Swiss and Swedish central banks have also cut by half a point.

Here is the Bank of England's statement. This was a good move and the expectation must be that rates have a lot further to fall.

Details are sketchy but the UK government appears to be on the brink of announcing a comprehensive banking bail-out. It follows a torrid day for the banks on the markets. Here's the BBC's report.

This is from the FT:

Gordon Brown, the UK prime minister, on Tuesday night ordered a massive taxpayer-backed cash injection to rebuild the balance sheets of Britain’s high street banks, effectively part-nationalising the sector at a cost of tens of billions of pounds.

Faced with an intensifying banking crisis, Mr Brown sanctioned moves for the taxpayer to recapitalise leading banks, in a bid to restore confidence in the system and to encourage them to start lending again.

The total cost of the scheme was estimated at between £35-£50bn, which is expected to be executed through the government acquiring preferred shares. Mr Brown is expected to insist the taxpayer receive generous dividends and profits on the deal if share prices recover.

Update: Here's the Treasury's press notice.

Ahead of its annual meeting next week, the IMF has released some early chapters from its World Economic Outlook. Here's a taster: "The current financial market meltdown being witnessed in the United States and other advanced economies will likely lead to longer and deeper economic downturns in some of these countries, according to new IMF research."

"Economies like the United States, with more arms-length or market-based financial systems, seem to be particularly vulnerable to sharp contractions in activity in the face of financial stress," Charles Collyns, Deputy Director in the IMF's Research Department, said at a press briefing today. Citing the chapter, "Financial Stress and Economic Downturns," he added that "this is because leverage tends to be more procyclical in these economies, which means that when a shock hits the financial system, the process of deleveraging can be more severe, and the risks of a credit crunch are greater." The research is here.

Meanwhile, US non-farm payrolls declined by 159,000 in September, their biggest monthly fall for five years.

The second quarter seems like a long time ago, particularly in the light of the September crisis in the markets and Congress's rejection of the White House's $700 billion bailout plan - a decision that must surely be reversed later in the week. But back in the real world, revised UK GDP figures were unremarkable. There was no growth in the second quarter, with the economy up 1.5% on a year earlier. Consumer spending slipped by 0.1% on the quarter, while investment dropped by 2.8%. The saving ratio recovered, though only to 0.4%. Details here.

The deal to rescue Bradford & Bingley is complex but appears to leave taxpayers pretty well protected, putting the burden for its mortgage losses on the banks, which is why bank shares have taken such a battering this morning. Is is a nationalisation? Not as we used to know them, perhaps more like what they call a conservatorship in America, though the Treasury statement, here, talks about public ownership. This is the Stock Exchange announcement.

Meanwhile, plenty of strings have been attached to the $700 billion US banking bailout. Here's the Wall Street Journal's summary of the bill.

All eyes have been on Washington, and the $700 billion rescue package. Closer to home we have had three speeches from monetary policy committee members this week - Kate Barker, Andrew Sentance and Sir John Gieve. The general sense from them is that the downside risks to the economy have increased but it is not falling off a cliff. The talk a few days ago was of an inter-meeting cut in Bank rate. These MPC members appear to be moving towards lower rates but they are not rushing anything.

Here is the Barker speech. This is Sentance and this is Gieve.

Ahead of the IMF's annual meeting, this is a rather good speech by John Lipsky, the IMF's deputy managing director, on the turmoil. The IMF is sticking to its forecast of roughly 4% global growth this year and next, with the low point reached towards the end of this year. Most of that growth, plainly, is in the emerging world. He sees further consolidation and shrinkage in the financial sector but thinks the global economy will remain relatively "resilient" in the face of this. The speech is here.

For the first time in several days the markets have been calmer, thanks to this morning's announcement of a co-ordinated injection of liquidity by the world's leading central banks, $180 billion in all. The Bank of England's announcement on the intervention is here.

Meanwhile, the Office for National Statistics announced a surprise 1.2% rise in retail sales last month, details here. Sales over the latest three months were still down by 0.8% over the previous three, though that could change with the September figures. Not for the first time in recent months, the official figures have caused surprise. One interpretation is that it is the effect of Europeans taking advantage of the strong euro and shopping in Britain. Or they could just be wrong ...

Unemployment rose by more than expected, the claimant count rising by 32,500 in August and the Labour Force Survey measure increasing by 81,000 to 1.72m in the three months to July. Wages growth was subdued. More details here. The figures strengthened the case for a cut in interest rates. Earlier this month David Blanchflower voted for a half-point cut, with the other eight members of the monetary policy committee on hold. The minutes are here

Inflation rose from 4.4% to 4.7%, more or less as expected, mainly reflecting the rise in gas and electricity prices but also higher food bills. There was better news on RPI inflation, which dropped from 5% to 4.8%. More details here. Mervyn King, in his letter to the chancellor predicts that CPI inflation will peak soon at 5% and drop sharply through 2009. His letter is here.

Lehman Brothers has filed for bankruptcy, Merrill Lynch is being taken over by Bank of America and AIG is being helped out by the US authorities. This is the most dramatic turn of events yet in the credit crisis/crunch. Some thought Bear Stearns marked the crisis's low point; others thought - briefly - that the previous weekend's rescue of Freddie Mac and Fannie Mae would draw a line under it. But this one runs and runs, and the markets are spooked, though not yet collapsing. Bloomberg has rolling reports here. The Bank of England has said it stands ready to intervene in the markets if necessary.

The FT-Acadametrics house price index showed a drop of 1.3% in August, its biggest yet, and a 2.2% fall on a year earlier, a product both of the latest monthly fall and downward revisions to earlier data. Prices are down by 4% from the peak, which occurred in February. Greater London, the South East and the North are the only areas not showing annual falls (the index does not cover Scotland or Northern Ireland). The discrepancy between the FT index and the lenders' measures remains but is starting to narrow.

This is Acadametrics' description of that discrepancy: "Whilst all house price indices are currently negative, the transaction based residential measures (FTHPI, Land Registry and CLG) that report on the final prices achieved in a sales transaction are giving a materially less negative picture of the market than are the mortgage offer based price indices (Halifax, Nationwide) which reflect each firm’s activity within particular market segments and prices that are still under negotiation." Full details of the index here.

Halifax is down nearly 13% over 12 months, while the Land Registry shows a fall of 2% and the FT-Acadametrics index is flat. The FT's online Money Show has had a look at these discrepancies and concluded, perhaps unsurprisingly, that its own index is the most accurate. That may be pushing it a bit - prices have certainly fallen - but there are good reasons, brought out in this podcast, why the lenders' data overstate it. It is the second item on the September 4 podcast, after a piece on the stock market.

There was never a serious prospect of a rate cut today but the case will build in the coming months. The monetary policy committee left Bank rate unchanged at 5% and issued no statement. Earlier the Halifax said house prices fell by 1.8% in August, in line with the Nationwide.

Alistair Darling's confusing but ultimately gloomy weekend message has continued to weigh on the sterling, pushing it to below $1.79 and to 1.23 against the euro. This government has not had to deal with a sudden loss of confidence in the pound before. Labour hasn't since the 1970s.

Also, the centrepiece of the housing rescue package appears to be a suspension of stamp duty on properties up to £175,000 for a year. It doesn't sound much, and isn't, but is above the average property price on the Nationwide's measure. It also announced other measures, notably an extension of shared equity schemes and purchases of unsold properties for social housing. Details here.

Land Registry figures are out, showing prices dropped 0.6% in July and were 2% down on a year earlier, rather different from the Nationwide's 10.5% fall. Details here.

Of rather more interest was David "Danny" Blanchflower's Reuters' interview, which I reproduce in full here.

Two million Britons may be out of work by Christmas and big cuts in interest rates are needed now to stop the economy heading into a deep and prolonged slump, Bank of England policymaker David Blanchflower told Reuters.

In an interview on Thursday, Blanchflower said the Bank could no longer be complacent because the economy was already shrinking and a rate cut of more than 25 basis points was probably needed.

He said his own forecast earlier this year that house prices could fall by 30 percent was looking optimistic and that the jobless total could spike higher as construction companies and banks lay off workers.

His unemployment forecast would mean some 330,000 people losing their jobs in the second half of the year.

"The fears that I have expressed over the last six months have started to come to fruition," he said, speaking ahead of next week's Monetary Policy Committee meeting.

"I've obviously voted on quite a number of occasions now for small cuts but we need to act and we probably need to act in larger amounts than that. We need to actually get ahead of the game and it appears that we are now behind."

Blanchflower, a U.S.-based academic who has often been a lone voice on the MPC in calling for lower rates for 10 straight months, said Britain could learn from the action of the Federal Reserve and interest rates should be substantially lower than the current 5 percent.

The pound fell by about a third of a cent against the dollar after his comments reinforced market expectations that borrowing costs could fall before the end of the year and that sentiment on the MPC may be edging towards Blanchflower's view.

"There are clearly signs that they are moving in that direction fairly slowly," said Jonathan Loynes, an economist at Capital Economics.

"Yes, rates probably should have started to come down by now but I can understand the uncertainty around that and why, as a central bank, they would want to err on the side of caution."

WISHFUL THINKING

Blanchflower described the Bank's forecast earlier this month of the economy standing still over the next year as "wishful thinking" and said things could be easily a lot worse.

"We are going to see much more dramatic drops in output," Blanchflower said. "The way to get out of it is to act, by interest rate cuts and fiscal stimulus and other things to try help people who are hurt through this."

"Sitting by doing nothing is not going to get us out of this and hoping that a knight in shining armour will come and lift us out of this is optimistic in the extreme."

And he said that an expected boost to exports from a weaker pound was unlikely to prove the "great rescuer" of the economy.

Other BoE policymakers, however, are more concerned about inflation, which is running at more than double the central bank's 2 percent target and expected to go higher still.

One MPC member, Tim Besley, even voted for higher interest rates earlier this month. The chief concern for the hawks is that higher inflation numbers now will feed through into wages as expectations of higher inflation become entrenched.

Blanchflower disagreed with that -- he thinks wage growth will weaken as unemployment rises because workers shy away from demanding higher more pay as they worry about losing their jobs.

The latest official figures show the number of people out of work increased by 60,000 in the three months to June on the internationally comparable International Labour Organisation measure to reach 1.67 million.

"To sit and worry about inflation expectations and what is going to happen to those, rather than worry about the fact that the economy is going to go into a recession seems to be misguided," he said.

"What we have now is a turning point in many ways -- certainly you might think of it as a paradigm shift. We have a global financial crisis, an oil shock coming, people with little experience of what is really going on."

Blanchflower said much of the debate about inflation was "very short-sighted".

"The question is what's going to happen in prices in 18 months down the road and the answer is inflation is going to plummet like a rock," Blanchflower said.

The arch-dove said he felt as if he was carrying the weight of the British people on his shoulders.

"I feel that things I have been fearful about have come to pass and I have actually been pretty accurate in what's coming and I have failed to convince the others (MPC members) of what is appropriate."

Barring further data revisions, which are always possible, the long expansion of the UK economy came to an end in the second quarter. Revised figures showed that the initially reported 0.2% rise in gross domestic product in the April-June quarter has now been marked down to zero. Thus, after 63 continuous quarters of economic growth, Britain ground to a halt in the second quarter. GDP was up by just 1.4% on a year earlier. Avoiding negative quarters for the remainder of this year now looks like an even bigger challenge.

The Office for National Statistics estimates that household spending fell by 0.1% during the quarter, while capital expenditure dropped by 5.3%. Manufacturing and construction were very weak, services barely grew. Further details here.

The official figures have been highly volatile recently and again they sprung a surprise for July, showing a 0.8% rise against expectations of a small fall. Sales over the latest three months were up by 0.7%. The retail sales deflator showed a 12-month rise in prices of 1.6%, the highest for 10 years, boosted by higher food prices. The significance of the figures is mainly in what they did not show. Had they been weak they would have triggered a wave of recession headlines. Details here.

Business investment fell by 1.9% in the second quarter - not good news. This is, however, a series prone to revision.

As expected, the two academics on the Bank of England's monetary policy committee (MPC) again went their separate ways earlier this month, Tim Besley voting for a quarter-point rate hike and David "Danny" Blanchflower, voting for a cut. The majority, seven, opted for no change, in line with the projections in the Bank's August inflation report. Either Besley or Blanchflower may turn out to be right in the end, but not both of them.

The case against a hike, by the majority of committee members, is made quite strongly in the minutes, suggesting they are happy to remain on hold for the time being. The minutes say: "The main risk would be that an unexpected rate rise might adversely affect business and consumer confidence, adding to the near-term downside pressures on activity and causing a material undershoot of the inflation target in the medium term. Although rates could be cut later in that event, the downturn would be unnecessarily deep, adding to the volatility in the economy." The minutes are here

Also today, the July public finances eased some of the pressure on the government, showing a current budget surplus of £6.6 billion. But this was £2 billion lower than a year earlier and cumulatively, the public finances are £9.3 billion further into the red than in the first four months of the 2007-8 fiscal year. The release is here.

The Bank of England, in its quarterly inflation report, predicted a difficult year ahead, with inflation rising to a peak of 5% or more and output "broadly flat" over the next 12 months. In other words, stagflation-lite. It stopped short of calling a recession and Mervyn King insisted the medium-term outlook would be much brighter but this was a pretty gloomy report.

Though the report said the inflation risks were on the upside and the growth risks on the downside, it has been interpreted as dovish on rates and sterling has dropped in response. Judge for yourself by accessing the report here, where the webcast of the press conference and the Bank's opening statement can also be viewed.

The report's publication followed figures showing that employment growth has slowed to a crawl and that unemployment is up on both the claimant count and Labour Force Survey measures. The good news was that average earnings growth slipped back to 3.4% and remains very subdued. The release is here.

A poor set of inflation figures, with the headline consumer price inflation rate rising from 3.8% to 4.4% and even the core rate, excluding food, drink, tobacco and energy, climbing from 1.6% to 1.9%. The 4.4% rate was not only above economists' predictions but saw UK inflation rise above that in the eurozone, which had a 4.1% rate in July.

According to the Office for National Statistics, food price inflation has "spiralled" to 13.7%, while gas and electricity bills were up by 16.1%. RPI inflation rose from 4.6% to 5%, while RPIX (excluding mortgage interest payments) saw a rise from 4.8% to 5.3%. Like CPI, this is more than double the target (the old RPIX target was 2.5%). Further details here.

The Bank of England will get a lot of criticism for these figures. It will be hoping the drop in oil prices - just above $110 this morning - and other commodities continues.

This will be a difficult week for inflation and the latest producer price figures show plenty of pressures still in the pipeline. Output price inflation rose to 10.2% in July, from 10% in June. Input price inflation was 30.1%. If you wanted to be optimistic, you would note that "core" output price inflation was unchanged at 6.7% and that input price inflation fell slightly from 30.8% in June and, if the fall in commodity prices persists, may have peaked. Details here.

After a rollercoaster week for data, which included a record monthly drop in retail sales (on the back of a record monthly rise), official figures showed a 0.2% rise in gross domestic product for the second quarter. The record run, 64 consecutive quarters of growth, thus continued. Will it do so this quarter? It could be a close-run thing.

Both construction (down 0.7%) and production (down 0.5%) showed declines, so GDP was kept going by the service sector, up 0.4%. Transport, storage and communication rose by 2.2% while business and finance scraped a 0.1% increase. Compared with a year earlier, GDP was up by 1.6%, which is a pretty good indication of 2008's likely growth outturn. More details here.

The two most "academic" members of the Bank of England's monetary policy committee (MPC) were diametrically opposed this month, David "Danny" Blanchflower voting for a quarter-point rate cut and Tim Besley favouring an increase of a similar amount. The other seven members opted for an unchanged 5% Bank rate. Nerves may be set on edge by the MPC's reference to August as the best time to communicate any rate change. The tone of the discussion appears to suggest, however, that the majority of committee members are happy to remain on hold. The minutes are here.

The latest numbers for the public finances make grim reading for the Treasury. Revenues are being hit by the weakening economy, so public sector net borrowing in June was £9.2 billion, compared with £6.3 billion a year earlier. In the April-June period net borrowing was £24.4 billion, up from £14.7 billion in April-June 2007. So a clear worsening, detailed here, at a time when the Financial Times has reported that the Treasury is considering a rewrite of the fiscal rules.

The Treasury has hinted before that the end of the economic cycle would provide an opportunity for reassessing the fiscal rules. But any change in the coming months will smack of political expediency.

The world economy is in a "tough spot" but the International Monetary Fund has revised up its growth numbers marginally. It now expects 4.1% global growth this year, slowing to 3.9% next. Projections for the UK are revised up to 1.8% this year, 1.7% next. Unusual to see anybody revising up growth forecasts these days, though the Fed also did so for the US economy earlier this week. The IMF's update is here.

A 15,500 rise in the claimant count to just over 840,000 last month will grab all the headlines, but the Labour Force Survey measure showed unemployment rising by a modest 12,000 in the March-May period, smaller than the originally estimated 38,000 increase for February-April. Employment was up by 61,000 over the March-May period. The job market is clearly softening, but gradually. Details here.

Consumer price inflation came out at 3.8% for June, higher than the 3.6% expected by analysts. It is all food and energy - core inflation is only 1.6% - but the Bank would like to see that core measure lower too. RPI inflation rose to 4.6%, from 4.3%. Interestingly, RPIX inflation, excluding mortgage interest payments, is now at 4.8%, up from 4.4%. Details here.

Also today, the British Retail Consortium suggests retail sales are weakening but not collapsing. On a total basis, sales were up by 2.1% on a year ago, while like-for-like sales were down by 0.4%. The survey is here. Also, the Royal Institution of Chartered Surveyors says the housing market has pretty much seized up, though buyer interest is said to be still there. Here are the details.

The FT house price index, compiled by Acadametrics, continues to provide an oasis of calm when set against the Halifax and Nationwide numbers. It showed a drop of 0.6% last month but a rise of 1.2% compared with a year earlier. Prices are slipping rather than crashing. The lenders' data started falling very sharply four months ago, and might have been expected to feed through to this, the broadest index, by now, so something is going on. The index is here, together with accompanying tables.

The Bank of England's monetary policy committee held Bank rate at 5%, as expected. Any other decision would have been a surprise, despite more downbeat news on the housing market, with the Halifax reporting a 2% drop in house prices last month. The next set of forecasts from the Bank (in August) will be interesting.

A clutch of weak surveys and official statistics to start the week. This morning's British Chambers of Commerce survey, here, has given rise to very gloomy headlines. Many of the survey balances are weak, though not quite as weak as they have been painted, being the weakest for a few years not 16. Judge for yourself. Also, manufacturing output fell by 0.5% in May and dropped by 0.2% in the latest three months. More here. The National Institute says these numbers are consistent with a 0.2% rise in gross domestic product in the second quarter.

On the housing front, the divergence between the lenders' data and other measures continues. The DCLG (Department of Communities and Local Government) house price measure fell by a modest 0.3% in May and was up by 3.7% on a year earlier. London house-price inflation actually increased. Mystified? The index is here.

Apart from Marks & Spencer, which has been making the headlines, there is more slowdown evidence from the Bank of England. Its latest credit conditions survey, here, shows that lenders tightened credit to households and businesses in the second quarter and expect to do so further in the third. Mortgages in particular are the subject of an intense squeeze.

Also from the Bank, the new deputy governor Charlie Bean, warned in his appointment evidence to the Commons Treasury committee that the Bank faces its most challenging time and cannot assume that the oil price rise that has so complicated things will quickly go away. With manufacturing, construction and services all feeling the squeeze, the downturn is gathering pace.

The new estimate for first quarter GDP (gross domestic product) was revised down to 0.3% (from 0.4%), with year-on-year growth lowered from 2.5% to 2.3%. Most striking was what happened to the personal sector - real household disposable incomes fell by 1% and the saving ratio plunged to just 1.1%. Not pretty. The details are here.

Some figures surprise, some are real shockers. A 3.5% jump in retail sales last month definitely fell into the latter category. People will probably have a Victor Meldrew response to this, the largest ever monthly jump in sales volume. More details here. Mervyn King's Mansion House speech, warning of deep gloom ahead, could not have been more in contrast. It is here.

The minutes of the monetary policy committee's June meeting showed, as expected, an 8-1 vote for no change, with David Blanchflower again the lone voice calling for a cut from 5%. But the story in the minutes is that the committee considered, and rejected, hiking rates. The fact that this was rejected, and for a number of reasons, should offer some reassurance, as should the fact that the MPC would not have been doing its job had it not considered all the options in the light of a deteriorating inflation picture. But the minutes, which are here, will have the effect of setting nerves further on edge.

Inflation rose above 3.3%, as generally expected, triggering a second governor-chancellor letter (and the chancellor's response) in more than 11 years of independence. Food and energy were the main culprits behnd the rise from 3%, though "core" inflation also edged up from 1.4% to 1.5%.

RPIX inflation, at 4.4%, was 1.9 percentage points above its old 2.5% target, compared with a 1.3 percentage point overshoot for CPI inflation. RPIX inflation jumped by 0.4 percentage points. In contrast, RPI inflation rose only modestly, from 4.2% to 4.3%.

Mervyn King's letter is here. It suggests inflation may rise above 4%, more than the Bank expected in its May inflation report, but lays the blame squarely on rising food and energy prices, responsible for 1.1 of the 1.2 percentage point rise in CPI inflation since December. It explains why the Bank has felt able to cut rates even though inflation is above target. But it warns against a more general shift in wage and price-setting behaviour. The Bank does not rule out higher rates but leans quite a long way against them.

Have migrant workers held down the wages of indigenous employees and increased unemployment among the young and unskilled? Not according to a new paper by Sarah Lemos and Jonathan Portes, published by the Department of Work and Pensions. It says, and I quote: "We find no statistically significant impact of A8 migration on claimant unemployment, either overall or for any identifiable subgroup. In particular we find no adverse impacts on the young or low-skilled. Nor do we find a statistically significant impact on wages, either on average or at any point in the wage distribution, although the evidence here is less complete." The full paper is here.

The slowdown can't shield Britain from global inflationary pressures but it is helping contain second-round effects via the labour market. Official figures showed that alongside a fourth consecutive rise in unemployment, earnings growth dropped to 3.2%, which will come as a relief to the Bank of England. The claimant count rose by 9,000 last month, while the broader Labour Force Survey measure increased by 38,000 in the three months to April. Employment was also up, by 76,000, over that period. Details here.

Mervyn King's keenly-awaited speech to the British Bankers' Association was interesting in its description of recent events and the relationship between the Bank and the banks. The governor is critical of the banks but stresses that they are now working together. But those hoping for clues on monetary policy will have been disappointed, in the text, available here, at least.

The producer prices numbers were predictably bad, with both the input and output series at new records. Output price inflation jumped to 8.9% while headline input price inflation was an astonishing 27.9%, even ahead of last week's surge in oil prices, only partly reversed this morning. Even core output price inflation was 5.9%. Details here.

If you're at the Bank of England and faced with numbers like this, you have to close your eyes and think it is just a blip. The alternative is too awful to contemplate.

The Bank of England left interest rates on hold at 5%, as universally expected, probably in an 8-1 vote. The Bank is caught between a rock - the credit crunch - and a hard place, rising inflation.

The Halifax reported that house prices fell by 2.4% last month, similar to the Nationwide's 2.5% fall. It is a reflection of the shift in housing market sentiment that numbers like this are losing the power to shock. Extrapolating the 6%-plus price fall over the past three months gives some very scary numbers indeed.

The most-watched coincident indicators of economic output, the purchasing managers' indices (PMIs), published by NTC in association with Royal Bank of Scotland, are all in for May, and they are all weaker than expected. Today we had the service sector index, which dropped from 50.4 to 49.8 (a level consistent with contraction) and showed a sharp drop in employment.

The PMIs for manufacturing, down from 50.8 to 50.0, and construction, down even more sharply from 46.1 to 43.9, pointed to an across-the-board slowdown for the UK economy. Normally these measures would be consistent with a rate cut from the Bank of England this week but inflationary pressures point firmly to no change.

The British Bankers' Association suggested a small increase in mortgage approvals between March and April but the Bank of England's figures have gone the other way, dropping from 63,000 to a new low of 58,000 and suggesting a significant loss of building society market share. The activity numbers for housing continue to plunge, though remortgaging picked up. The details are here

This is a time for celebration in euroland. The European Central Bank (ECB) will celebrate its 10th anniversary next Sunday with its reputation — and that of the single currency — riding high. The euro will be a decade old in January, having surprised the sceptics simply by virtue of its survival.

The days when the euro was described in the currency markets only by names unmentionable in polite company are long gone. It has been hitting new highs against both sterling and the dollar this year, having virtually doubled in value in terms of the greenback from its all-time lows.

The time when the ECB was a byword for amateurism is also long gone. The BBC may have been pushing it last week to describe its president, Jean-Claude Trichet, as the world's most influential central banker — the Federal Reserve's Ben Bernanke surely holds that position — but there is no doubt that the ECB's reputation has been enhanced and, as the BBC also suggested, in the eyes of the markets it has had a much better credit crisis than our own Bank of England. That, I'm sure, led to more than a little gnashing of teeth in Threadneedle Street.

Amid all this celebration, however, some of which verges on the smug, there is a danger at the heart of euroland. These days financial markets tend to look at the euro through the prism of Germany, forgetting there are 14 other members (Cyprus and Malta joined this year, Slovenia last). Some of those 14 have been in from the start and are finding life very tough and getting ever tougher due to the euro's rise.

I am referring to euroland's "Pigs". Pigs, like "Brics" is an acronym, though less flattering to those who fall into it. While Brics refers to the fast-growing emerging economies of Brazil, Russia, India and China, the Pigs are the struggling euroland countries of Portugal, Italy, Greece and Spain.
I don't want to upset anybody on the other side of the Irish Sea,
but I should say that in some versions there are two i's in Pigs.

A couple of recent issues have brought the Pigs issue to the fore. One was the release of first-quarter gross-domestic-product numbers for euroland. These showed a healthy 0.7% rise, vindicating the ECB's cautious stance on interest rates, but they also showed growth heavily tilted towards Germany, where GDP jumped by 1.5%, and against Spain, where the rise was only 0.3% and Portugal, where there was a 0.2% fall.

Figures for Greece are not yet available. Italy's GDP rose 0.4% on the quarter but was only 0.2% up on a year earlier. The Italian economy has been noticeably weak for the past few years. Silvio Berlusconi, recently re-elected as the country's prime minister, has been cool on the euro for some time, once memorably saying that the single currency had "screwed everybody".

Germany's first-quarter GDP jump was probably an aberration, though the latest Ifo index of business activity and confidence, published last week, was also upbeat. The federal republic is benefiting from the fact that it is not only the world's biggest exporter, with a large stake in fast-growing emerging markets, but also that it has gained competitiveness within euroland.

Germany's gain, however, is others' loss. When the euro started, nearly a decade ago, the original conversion rates from national currencies were helpful to weaker economies like Italy and unhelpful to Germany, which started at a competitive disadvantage. Ten years of productivity gains and cost-cutting have more than removed that disadvantage.

The fact that the Pigs are struggling is, in one sense, a simple reflection of the underlying problem of the euro, that the countries that joined it did not constitute an "optimal" currency area. They were not, in other words, either converged or flexible enough and have not adapted sufficiently to the challenge of living alongside Germany in a "one size fits all" currency area. This is compounded by particular problems in some member countries, such as Spain's building boom and bust. Greece's government debt is 95% of GDP and its current-account (balance- of-payments) deficit 14%.

Professor Andrew Clare of City University, in a research note for Fathom Consulting, entitled Pigs Might Fly, puts the problem simply: "The economic evidence that we have at the moment suggests that the 'one- size-fits-all' approach to monetary policy has benefited some economies and punished others."

This does not mean that any of the euro's members are rushing for the exits. It could be that even Germany will find life tougher as some of its export markets struggle and that euroland's economies will all soon be united in gloom.

It is also the case that the euro's weaker members, the Pigs, would have a lot to lose if they left the single currency. They would not merely suffer in terms of credibility and convenience, but it would hit any government opting for such independence hard in the coffers. Fathom estimates that the cost of official borrowing, measured by the spread of bond yields over their German equivalents, would rise sharply. Britain's departure from the European exchange-rate mechanism (ERM) in 1992 was child's play compared with untangling from the euro.

In the longer term, however, the problems for the Pigs may grow. "The failure of eurozone governments to implement the necessary reforms during the recent good times may eventually sow the seeds of the break-up of the eurozone and the demise of the euro," writes Clare. "Nothing lasts forever."

The 15th or 20th anniversary of the euro may be less celebratory than the 10th. Pigs may indeed fly.

PS: Some very senior policymakers in Britain think the rise in food and oil prices, the latter hitting $135 a barrel, is now a more serious threat than the credit crunch. A growing chorus in the City, led by Tim Bond of Barclays Capital, thinks the echoes of the great inflation of the 1970s are more powerful than those of the 1930s Great Depression.

Are commodity prices a huge bubble? Should we worry that the huge sums being poured by investment banks and hedge funds into commodities and index futures are the next sub-prime crisis in the making? That was the line taken by a rather good Radio 4 File on Four programme last week and I have a lot of sympathy with it.

However, the bubble goes on building, to the point where rational analysis goes out of the window. When a prominent oil investor such as T Boone Pickens says prices are going to $150 a barrel, the markets do not take it for what it is, a vested interest talking, but another excuse to buy. Even those who look at the economic fundamentals have almost given up the fight; the Bank of England in its latest minutes (an 8-1 vote for no change in interest rates this month) said it did not expect a significant increase in supply, and consequent fall in prices, for the next two to three years. Supply is increasing — one estimate suggests a 700,000 barrels-a-day rise this month by the Organisation of Petroleum Exporting Countries — but the market has got the bull by the horns.

Financial markets move quickly, with a 35% rise in oil prices this year alone, but the "real" economic response is slower. That response eventually happens, though, and any turnround in prices may be reinforced by the rush for the exits by investors.

Some people compare commodities with property, but there is an important difference. Everybody who wrote about the housing market, for example, recognised a long time ago that there had to be a limit on price rises and the debate was how we adjusted after a period of very strong increases. What worries me about commodities is that many in the markets seem to think there are no limits, believing it is onwards and upwards to $200, $300 or even $500-a-barrel oil. That's definitely bubble talk.

From The Sunday Times, May 25 2008

The detailed first quarter GDP figures showed a 0.4% rise and an increase of 2.5% on the year, in line with the provisional data. But the details, which included a 1.3% rise in consumer spending during the quarter, suggested a significant slowdown is on the way as consumers rein back. Details here.

After the shocking inflation numbers of the past couple of days, few could have expected a reassuring inflation report from the Bank of England. Sure enough the picture it pains is a very gloomy one. The Bank is caught between external inflationary pressures and a rapidly cooling domestic economy. The inflation report does not rule out further rate cuts but it suggests they will be very modest.

The Bank should not stand in the way of the necessary rebalancing of the economy, the Governor said, and the risks to even its weak growth forecast (implying a slowdown to 1% a year by the end of the year) are to the downside. It still expects a recovery next year as the credit crisis eases and the effects of sterling's decline kick in. But all in all, a pretty grim picture. More details here.

Inflation jumped to 3% in April, from 2.5% in March, much worse than even the gloomiest analysts had expected. Given what has been happening to fuel and food prices, we should perhaps not be too astonished, though petrol does not seem to have been a big factor in the April numbers. Household energy bills were, as were food, alcohol, bank charges and furniture.

Perhaps we should not have been too surprised either given the producer price numbers, but the figures point to a difficult few months and the markets have already reacted. A June rate cut, which had been widely expected, now looks very doubtful, and last week's monetary policy committee decision is likely to have been clear cut against a reduction. Further details here.

The uncomfortable mix of high inflation and slowing growth the Bank of England will warn of this week is reinforced by the latest producer price numbers, which showed big rises in both input and output prices. The surge in oil prices helps explain a 23.3% rise in import prices over the past year but a 7.5% annual increase in manufacturers' output prices, a 4.6% "core" rate, looks on the face of it alarming. Details here.

The FT-Acadametrics house price index continues to provide a much calmer picture than other measures. It reckons prices slipped by 0.2% last month, as in March, to take the annual rate down to 4.1%. Regionally, annual rates range from 0.9% in Wales to 10.7% in Greater London. This is one index pointing to flat rather than collapsing prices. Details here.

Repossession orders rose in the first quarter, though by slightly less than had been predicted in some of the morning papers. Here's the BBC's online report.

The Bank of England's monetary policy committee left Bank rate unchanged at 5%, as most analysts had expected, despite a late flurry of weak data. Attention will now switch to the Bank's quarterly inflation report on Wednesday.

For those who are interested, there is a new paperback edition of my book The Dragon and the Elephant: China, India and the New World Order. Pocket-sized and with a new introduction, it can be bought on Amazon for the incredibly low price of just £6.29. Here's a link.

Is the glass half full or half empty? The Bank of England's six-monthly Financial Stability Report has been reported as saying the worst of the crisis is over. It is, perhaps, a bit more measured than that but it does say that while the credit crisis is "proving even more prolonged and difficult than anticipated" there are reasons for optimism.

Prices in some credit markets are now likely to overstate the losses that will ultimately be felt by the financial system and the economy as a whole, it says, as they appear to include large discounts for illiquidity and uncertainty. Conditions should improve as market participants recognise that some assets look cheap relative to credit fundamentals.

According to John Gieve, deputy governor with responsibility for financial stability: “The unavoidable correction after the credit boom is proving protracted and difficult. However the pricing of risk in credit markets seems to have swung from being unsustainably low last summer to being temporarily too high relative to fundamentals. So, while there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually in the coming months.”

The report is here.

The Nationwide Building Society reported that house prices fell by 1.1% in April and were down by 1% on a year earlier, the first year-on-year fall on its index since 1996. The shift from 10.2% house-price inflation in April last year has been abrupt. Details here. Also, a doom-laden speech from monetary policy committee member David Blanchflower, warning that house prices could fall by a third and that interest rates need to be slashed to head off a UK recession. The speech is here.

Mortgage approvals in March hit a new series low of 64,000, down from 72,000 in February (itself revised down) and an average of 81,000 over the previous six months. Though the figure was weak, it was perhaps not as weak as it could have been given earlier data from the British Bankers' Association. Total approvals, including remortgaging, dropped from 243,000 to 220,000. In cash terms lending was £6.9 billion, and the growth rate slowed from 9.4% to 9.1%. Other consumer credit rose by £1.2 billion, a more normal figure after February's £2.3 billion jump which got everybody excited. But this was enough to put the growth rate of consumer credit up from 6.5% to 6.7%. Details are here.

The economy grew by a below-trend 0.4% in the first quarter, broadly in line with expectations - the choice was between 0.4% and 0.5%. GDP was up by 2.5% on a year earlier. So 63 consecutive quarters of growth, but clearly slowing from last year's pace. Details available on the ONS website.

A puzzling set of figures. While retail sales volume dipped in March by 0.4%, as expected, there were upward revisions to earlier data. The result was that sales in the January-March period were up by 2% on the previous three months and by 5.6% on a year earlier. While some of this may reflect higher prices not picked up in the data breakdown - food spending was up sharply - it does not fit the picture of a beleaguered consumer we have come to expect. Details here.

Meanwhile, the CBI's latest industrial trends survey suggested, along with the strongest price pressures since 1995, orders and output were weaker than expected. Exporters are raising their prices in response to price pressures, neutralising some of the gains from sterling's fall against the euro. This is the press release.

The Bank of England's monetary policy committee (MPC) split three ways in voting to cut Bank rate to 5% earlier this month. Six members, Mervyn King, Rachel Lomax, Sir John Gieve, Paul Tucker and Charlie Bean (the Bank insiders) voted for a quarter-point cut along with Kate Barker. One external member, David Blanchflower, wanted a half-point reduction while two, Tim Besley and Andrew Sentance, preferred to wait, voting against a cut.

This was the majority view: "For the majority of members, the outlook and the balance of risks around the Committee’s central projection for inflation warranted a reduction in Bank Rate of 25 basis points at this meeting. In order to avoid an excessive increase in the margin of spare capacity and hence undershooting the inflation target in the medium term, it was necessary to offset, partly but not wholly, the current and prospective downward shift in demand arising from the deterioration in global credit conditions and its consequences. A 25 basis point reduction now would be consistent with market expectations of a gradual easing of Bank Rate, which had been informed both by the February Inflation Report and by subsequent communications by Committee members. A reduction in Bank Rate now would also reduce the ‘tail’ risk of an unexpectedly sharp slowdown in demand later in the year, which, if it materialised, might then require a more vigorous policy response in order to hit the inflation target further out." The minutes are here

The details have been announced of the Bank's liquidity scheme, for which initial take-up is expected to be £50 billion. This is a bold move, under which banks will be able to "swap illiquid assets of sufficiently high quality for Treasury Bills. Responsibility for losses on their loans, however, stays with the banks. By tackling decisively the overhang of assets in this way, the Scheme aims to improve the liquidity position of the banking system and increase confidence in financial markets".

The aim is to tackle the "overhang" of asset-backed securities on bank balance sheets, which the Bank says is the factor making them reluctant to lend to each other. According to Mervyn King: “The Bank of England’s Special Liquidity Scheme is designed to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks.” There will be plenty more to be said about this. In the meantime, here is the Bank's statement.

A very good speech by Charlie Bean, the Bank's chief economist, which is worth reading in detail. Among the nuggets - he does not see any early easing of upward pressure on oil and commodity prices, which means inflation is likely to exceed 3% and Mervyn King will have to write another letter. He is sticking to his view that house prices can fall further without damaging consumer spending. Only 5% of people with mortgages have less than 20% of equity in their homes, he says, which suggests negative equity isn't looming quite as large as some of today's reports imply. The speech is here.

After yesterday's inflation numbers, which were better than analysts expected, some more good news in the labour market data. While the drop in the claimant count slowed to a crawl, just 1,200 to 794,300 last month, employment was strong, up 152,000 to a record 29.5m in the December-February quarter. Average earnings growth remained comfortably below 4%, 3.7% including bonuses. More details here.

The Group of Seven finance ministers and central bankers, meeting in Washington, conceded that the credit crisis had become much more serious than they expected, though stopped short of declaring that the US was in recession. They endorsed the Financial Stability Forum's proposals. Here is the communique:

"We met today amid ongoing challenges to the world economy and international financial system.

The global economy continues to face a difficult period. We remain positive about the long-term resilience of our economies, but near-term global economic prospects have weakened. While economic conditions differ in our countries, downside risks to the outlook persist in view of the ongoing weakness in U.S. residential housing markets, stressed global financial market conditions, the international impact of high oil and commodity prices, and consequent inflation pressures. The performance of emerging markets has been a bright spot, but these countries as well are not immune from global forces.

The turmoil in global financial markets remains challenging and more protracted than we had anticipated. In the context of a weaker economic outlook, financial markets confront the interrelated issues of: re-pricing of risk and significant de-leveraging; managing counterparty risks; accommodating balance sheet adjustments; raising capital; improving the liquidity and functioning of key markets. We welcome efforts by many financial institutions to improve disclosure of exposures to structured products and related risks, and raise significant new capital.

We reaffirmed our strong commitment to continue working closely together to restore sustained growth, maintain price stability, and ensure the smooth and orderly functioning of our financial systems. We welcome the coordination by major central banks to address liquidity pressures in funding markets and recognize the importance of their coordinated actions to address disruptions in global financial markets. In particular, the recent steps taken by some central banks to expand access to central bank lending facilities and expand the range of collateral that they will accept is providing liquidity to financial institutions and helping to support improved market functioning. In addition, we welcome other measures that have been taken including monetary and fiscal policy that aim to give support to underlying economic activity and ensure price stability. Each of us remains committed to taking action, individually and collectively as appropriate, consistent with our respective domestic circumstances.

We reaffirm our shared interest in a strong and stable international financial system. Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate. We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate.

Last fall we tasked the Financial Stability Forum (FSF) for a report identifying the underlying causes and weaknesses in the international financial system that contributed to the financial market turmoil. We thank Mario Draghi, the chairman of the Financial Stability Forum, and FSF members, for the report that sets out detailed recommendations to enhance market and institutional resilience. We, the G-7, strongly endorse the report and commit to implementing its recommendations. Rapid implementation of the FSF report will not only enhance the resilience of the global financial system for the longer term but should help to support confidence and improve the functioning of the markets.

The FSF report presents a specific and substantive set of recommendations across five major areas. We have identified the following recommendations among the immediate priorities for implementation within the next 100 days:

* Firms should fully and promptly disclose their risk exposures, write-downs, and fair value estimates for complex and illiquid instruments. We strongly encourage financial institutions to make robust risk disclosures in their upcoming mid-year reporting consistent with leading disclosure practices as set out in the FSF's report.

* The International Accounting Standards Board (IASB) and other relevant standard setters should initiate urgent action to improve the accounting and disclosure standards for off-balance sheet entities and enhance its guidance on fair value accounting, particularly on valuing financial instruments in periods of stress.

* Firms should strengthen their risk management practices, supported by supervisors' oversight, including rigorous stress testing. Firms also should strengthen their capital positions as needed.

* By July 2008, the Basel Committee should issue revised liquidity risk management guidelines and IOSCO should revise its code of conduct fundamentals for credit rating agencies.

We endorse the following FSF proposals for implementation by end-2008:

* Strengthening prudential oversight of capital, liquidity, and risk management: The Basel II capital framework needs timely implementation. The Basel Committee should raise capital requirements for complex structured credit instruments and off-balance sheet vehicles, require additional stress testing, and enhance their monitoring.

* Enhancing transparency and valuation: The Basel Committee should issue further guidance to enhance the supervisory assessment of banks' valuation processes to strengthen disclosures for off-balance sheet entities, securitization exposures, and liquidity commitments.

* Changing the role and uses of credit ratings: Investors need to improve their due diligence in the use of ratings. Credit rating agencies should take effective action (consistent with IOSCO's revised code of conduct) to address the potential for conflicts of interest in their activities, clearly differentiate the ratings for structured products, improve their disclosure of rating methodologies, and assess the quality of information provided by originators, arrangers, and issuers of structured products.

* Strengthening the authorities' responsiveness to risk: Supervisors and central banks should further strengthen cooperation and exchange of information, including the assessment of financial stability risks. It is important that an "international college of supervisors" be established for each of the largest global financial institutions. Market authorities also should act cooperatively and swiftly to investigate and penalize fraud, market abuse, and manipulation.

* Implementing robust arrangements for dealing with stress in the financial system: Central banks should be able to supply liquidity effectively during financial system stress, and authorities should review and where necessary strengthen their arrangements for dealing with weak and failing banks, domestically and cross-border.

We ask the FSF and its working group to monitor actively the implementation of the report's recommendations. It is important that member bodies of the FSF, including the Basel Committee, IOSCO, the IASB, and the Joint Forum, accelerate their timetables of work to conclude their efforts by end-2008 and that the recommendations of the FSF be fully and effectively implemented. We look forward to an update at the Osaka meeting in June and a comprehensive follow-up report by the FSF at our meeting in the fall. We welcome the strengthened cooperation between the FSF and IMF, which should enhance the early warning capabilities of key risks to financial stability.

We also welcome efforts by private-sector participants to develop proposals to contribute to a better functioning of the financial system.

The current financial market turmoil also has raised broad policy issues about the appropriate regulatory frameworks of our financial sectors. We have reaffirmed the importance of reviewing regulatory frameworks to consider whether changes are necessary to ensure that our financial systems are as efficient and stable as possible in the future.

We reaffirm the important role for the IMF in securing global financial stability. In this light we endorse the significant progress on IMF reform:

* We welcome the agreement on quota and voice reform in the IMF as an important step to recognize the greater global weight of dynamic economies, many of which are emerging markets, and increasing the voice of low income countries.

* We reiterate the importance we place on the IMF's new framework for surveillance, including for exchange rates, and urge its firm and even-handed implementation.

* We welcome progress toward putting the IMF's finances on a more sustainable footing, including a $100 million annual reduction in administrative expenses. Ongoing budget discipline will be required. We support new sources of income, including an endowment financed by a limited sale of IMF gold.

Taken together, these important reforms will boost the IMF's legitimacy, effectiveness, and credibility.

Upholding open trade and investment regimes is critical to realizing global prosperity and fighting protectionism. We highlight the urgent need for a successful conclusion to the Doha Development Round. We also commend the OECD work on open investment and the IMF's commitment to deliver a set of best practices for Sovereign Wealth Funds by the IMF Annual Meetings in October. The policy principles put forward by Abu Dhabi, Singapore, and the United States should be helpful inputs into these processes."

After the dramas of the Halifax's 2.5% price fall last month, a calmer picture from the FT-Acadametrics index. It reports that prices were flat in March and up by 5.4% on a year earlier. I suspect it won't get quite as much attention. Details here.

The Bank of England's monetary policy committee (MPC) cut by a quarter to 5%, as generally expected. Speculation will start immediately on whether there will be another reduction in May. This is the Bank's statement:

"The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.0%.

CPI inflation rose to 2.5% in February. The Committee expects inflation to rise further this year, reflecting the continuing impact of higher energy and food prices, as well as the recent depreciation of sterling on import costs. Such pressures are already evident in producer input costs and pricing intentions.

Even if commodity prices remain at their current high levels, inflation should fall back. But to ensure that inflation meets the 2% target in the medium term, the Committee needs to balance two risks. On the upside, above-target inflation this year could raise inflation expectations so that, in the absence of some margin of spare capacity, inflation would remain above the target. On the downside, the disruption in financial markets could lead to a slowdown in the economy that was sufficiently sharp to pull inflation below the target.

In the Committee’s judgement, the balance of these risks to the inflation outlook in the medium term justifies a cut in Bank Rate this month. Credit conditions have tightened and the availability of credit appears to be worsening. While the recent depreciation in sterling will support net exports, the prospects for output growth abroad have deteriorated. In the United Kingdom, business surveys suggest that growth has begun to moderate and that a margin of spare capacity will emerge during this year. This should help to keep domestic inflationary pressures in check in the medium term.

Against that background, the Committee judged that a reduction in Bank Rate of 0.25 percentage points to 5.0% was necessary to meet the 2% target for CPI inflation in the medium term.

The minutes of the meeting will be published at 9.30am on Wednesday 23 April."

The House of Lords Economic Affairs Committee says immigration is of little or no benefit to the UK, helping employers and the immigrants themselves but disadvantaging other groups in society, including the low paid and young workers. The big question will be whether an assessment of this kind can ever pick up on dynamic as well as static effects, or properly answer the "as if" question on what would have happened to the UK economy in the absence of immigration. Neither the government's figure of a £6 billion GDP boost, or the committee's assessment that there is no increase in GDP per capita, capture this.

Given the amount of coverage it is interesting that the report is not published yet. It will be available here. In the meantime, here is a BBC report.

The Nationwide is emerging as the gloomiest of the house price series, as it was in the early 1990s. Prices have fallen by 0.6% this month, it says, and are now up by only 1.1% on a year earlier and annual house-price inflation will soon be down to zero. From their peak in October, prices have dropped by 2.8%. The credit crunch is having a big impact, exemplified by Nationwide's own decision to raised the rates on its tracker mortgages for new borrowers. This is the "new and different phase" Mervyn King referred to in the credit crisis. Until credit conditions thaw, the market will remain under pressure. More details here.

Also out today, figures confirming that the economy grew by 0.6% in the final quarter of 2007. The saving ratio edged up modestly from 2.6% to 3.3%. Consumer spending rose by only 0.1%. More details here. There was better news on the current account, which narrowed to a deficit of £8.5 billion in the fourth quarter, from a record £19.1 billion in the third, confirming that the credit crisis badly distorted the third quarter numbers. More here.

There's plenty of reporting today on Mervyn King's evidence to the Commons Treasury committee and the Financial Services Authority's report on its own failings over Northern Rock. But it is worth reading their own words, including King's balanced introductory remarks, available here, and the FSA's report, here.

While retailers have been talking doom and gloom, and consumer confidence is very weak, the official figures showed strong retail sales last month, with a jump of 1% on the month and 5.5% on a year earlier. Food sales were very strong, up 1.6% in volume, suggesting either that consumers were comforting themselves or that the statisticians may not have fully picked up food price inflation effects. The details are here.

The Bank of England's monetary policy committee (MPC) voted 7-2 to keep Bank rate unchanged at 5.25% earlier this month, Sir John Gieve (joint deputy governor) joining David Blanchflower in voting for a cut. The tone of the minutes suggested the MPC is more concerned about the downside risks to growth than the upside risks to inflation and brings into play the possibility of an April cut, though May is still favoured by most analysts. The minutes are here.

The Fed held back from the full percentage point rate cut many in the markets were looking for, and there were two dissenters on the Federal Open Market Committee on the size of the cut. Nonetheless, the Fed Funds rate is down from 3% to 2.25%. Here is the Fed's statement:

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York and San Francisco."

CPI inflation rose to 2.5% last month, from 2.2% in January, under the impact of higher energy bills. The rise was much as expected, balanced by a further fall in "core" inflation to an 18-month low of 1.2%. RPI inflation was unchanged at 4.1%. Further details here.

The speculation on Friday was that J.P. Morgan would buy Bear Stearns for a dollar a share. In the event they paid two, and the Fed stepped in with an emergency discount rate cut to 3.25%, lending of $30 billion to J.P. Morgan and additional provisional of liquidity to the markets. If this is America's Northern Rock, it has happened much more quickly. It is, of course, a much bigger story. The Fed's statement is here.

The Fed has acted again to provide liquidity to the markets - $200 billion worth - in tandem with other central banks, helping Wall Street to a 417-point gain. This was the Fed's statement earlier:

"Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets. Pressures in some of these markets have recently increased again. We all continue to work together and will take appropriate steps to address those liquidity pressures.

To that end, today the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing specific measures.

Federal Reserve Actions
The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.

In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.

The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion."

This is a rather good speech by William Poole of the St. Louis Fed. It argues that subprime followed a long tradition of financial innovation, in which there is a tendency for that innovation to go too far, then face a painful correction. Lessons have been learned, and in time subprime will make a comeback, he argues. He also suggests we are a long way from a re-run of the Great Depression. The speech is here.

While most other house price measures fell last month, the FT-Acadametrics index rose by 0.5%. As it says: "On a monthly basis, house prices in England and Wales rose by a modest 0.5% in February following a three month run of growth rates hovering around zero. On an annual basis, prices increased by 6.1%, down from 6.8% in January. This is the sixth successive month in which the annual rate has fallen and the lowest annual growth rate since June 2006.
London continues to be out of step with the rest of England and Wales, with an annual growth rate of 12.7% (averaged over the last three months) which is some 5% points higher than the next highest region." Details here.

The index presents a bit of presentational problem for the FT, which has taken a more downbeat line on the housing market than its own measure.

The Bank of England held interest rates at 5.25%, as overwhelmingly expected. Though house prices dipped by 0.3% last month, according to the Halifax, other data has been reasonably strong and the monetary policy committee will be concerned about inflationary pressures signalled in the surveys and in commodity markets.

We now have the purchasing managers' surveys for both services and manufacturing for February, and they suggest that growth has held up reasonably well in the first quarter. The service sector purchasing managers' index rose from 52.5 to 54.0 and the manufacturing index, published a couple of days ago, showed a rise from 50.7 to 51.3. Both suggested inflationary pressures are more of an immediate worry than growth, which is why the Bank of England is generally expected to keep interest rates on hold this week.

Statement from the Reserve Bank of Australia:

"At its meeting today, the Board decided to increase the cash rate by 25 basis points to 7.25 per cent, effective 5 March 2008.

This adjustment was made in order to contain and reduce inflation over the medium term. Inflation was high in 2007, with an annual CPI increase of 3 per cent in the December quarter and underlying measures around 3½ per cent. Domestic demand grew at rates appreciably higher than the growth of the economy’s productive capacity over the year. Labour market conditions remained strong into early 2008 and reports of high capacity usage and shortages of suitable labour persist. Inflation is likely to remain relatively high in the short term, and will probably rise further in year‑ended terms, before moderating next year in response to slower growth in demand.

The Board took account of events abroad and developments in financial markets. The world economy is slowing and it appears likely that global growth will be below trend in 2008. Recent trends in world commodity markets, however, have further strengthened prospects for Australia’s terms of trade.

Sentiment in global financial markets remains fragile. Australian financial intermediaries are experiencing increases in funding costs, which are being passed on to customers. Some tightening in credit standards for more risky borrowers is occurring.

There is tentative evidence that some moderation in household demand is beginning to occur, with business and consumer sentiment softer recently, and household credit demand slowing somewhat. The extent of that moderation is uncertain, however. As the Board noted last month, a significant slowing in demand from its pace of last year is likely to be necessary to reduce inflation over time.

Having weighed both the international and domestic information available, the Board concluded that a further tightening in monetary policy was needed to secure an inflation rate of 2‑3 per cent over time. As a result of this and earlier actions, and rises in borrowing costs which are occurring independently of changes in the cash rate, the overall tightening in financial conditions since the middle of 2007 is substantial. The Board will continue to evaluate prospects for economic activity and inflation in the light of new information."

The Nationwide reported that house prices have slipped by 0.5% this month, and are now just 2.7% up on a year earlier. This followed Land Registry figures showing a 0.9% rise in house prices in January. Details of the Nationwide release are here. Meanwhile, the Bank of England said that mortgage approvals edged up to 74,000 last month, from 72,000 in December. They’re still very subdued, but not collapsing. Details here.

The dollar's latest dive, apart from taking sterling back towards the $2 level, has pushed the euro above $1.50 for the first time since the single currency came into being in January 1999. Good for US exporters, not necessarily for US inflation or confidence in the American economy.

Nobody appears to have told Britain's consumers that they are supposed to be battening down the hatches. Amid tumbling consumer confidence and deepening debt worries, retail sales volume rose by 0.8% last month and was a hefty 5.6% up on a year earlier. Though supported by price cuts (sales value was up by 4.8% year-on-year) there appears to be some underlying strength. The volume of household goods sales in the latest three months rose by 9.8%, the fastest since February 2002. More details here.

The Bank of England's monetary policy committee voted unanimously to cut rates earlier this month, the only "dissenter" being David Blanchflower, who voted to cut by half a point rather than a quarter. The Bank is clearly concerned about the downside risks to growth and the MPC clearly regarded the decision to cut as something of a no brainer. That must argue for further cuts, despite the cautious tone of the February inflation report. The minutes are here.

The Treasury, having examined the two remaining private sector bids for Northern Rock, has decided neither served the interests of the taxpayer, so Alistair Darling has announced nationalisation. As set out below, many of us will need a lot of persuading that the return of the failed model of nationalisation is the best way out of this mess. Since it is unthinkable that a nationalised Northern Rock could compete with the private sector on level terms for an extended period, the Treasury talks about temporary public ownership. In his statement, Alistair Darling also talks about the bank being run on an arm's length basis from the government and of it being returned to the private sector when financial conditions permit. His full statement is here.

A curious Lex column in the Financial Times this morning, which says the following, under the headling Pounded:

"Sometimes currencies do what they’re supposed to. Last year analysts were at odds as to why the British pound was so strong (the lazier explanations included the lure of London and that the country speaks English). But by the year end they were virtually unanimous that sterling would fall – and so it has. Compared with the highest exchange rates recorded last year, the pound is down 15 per cent against the yen and the euro. Versus the dollar, which itself is in a tail-spin, sterling has lost 7 per cent of its value."

In fact, forecasters who by the year end were unanimous in predicting that sterling would fall were behind the game - it already had, though from a position where a year ago it was at its highest level since the early 1980s. The story of the first few weeks of this year has been one of sterling stability. The sterling index is roughly where it was at the start of the year and the Bank's broader trade-weighted index is up. Sterling may well fall this year. It hasn't yet.

The Bank of England's inflation report set out the dilemmma between a significant rise in inflation in the short-term and a sharp slowdown in growth. It left open the door to lower interest rates - on unchanged rates inflation will undershoot the 2% target in two years - but not the kind of cuts the markets are expecting. Compared with market expectations of a reduction to 4.5%, the Bank is signalling a cut to 5% or 4.75% (my forecast).

This was an interesting report. Mervyn King, while warning that the risks to the growth forecast - which will see it declining to a low of around 1.5% - went out of his way not to be too gloomy. He thinks it is odds-on that he will have to write a letter explaining why inflation has moved above 3% (or below 1%) over the next two years but appears unfazed by that. He also said that house prices should be in for a long period of stability.

The broad message was that the markets have got somewhat ahead of themselves on rates but that further cuts are likely, in spite of the short-term inflation problem. The report is here.

Also today, labour market statistics were published showing that things remain healthy, with a 16th consecutive fall in claimant unemployment and a 175,000 quarterly rise in employment. The job market is holding up well at a time when earnings growth remains steady. Here's the release.

Consumer price inflation rose only slightly, to 2.2%, from 2.1% in December. After yesterday's producer price numbers, something a lot worse might have been expected, so the figures came as something of a relief. RPI inflation also rose, from 4% to 4.1%. RPIX inflation, the old target measure, increased from 3.1% to 3.4%, close to the point where it would have triggered a letter from the governor in the old days. More details here.

Users will notice that comments on the site are closed. I do this with regret but a plague of spammers and moronic nuisance callers makes the task of moderating too time-consuming and has spoiled it for the rest. The discussion forum remains open. Those who want to join should register by clicking on it, then e-mail me with their user name.

Official figures showed a nasty jump in both input and output prices, with output price inflation now up to 5.7%, its highest since 1991, and input price inflation a hefty 19.1%. Core output price inflation was 3.1%. The figures underline the Bank of England's dilemma. Details here. Also today, the trade deficit on goods and services narrowed to £4.7 billion in December but this was no cause for celebration - the November figure was revised up from £4.4 billion to £4.8 billion. Overall, there was a deficit of £51 billion in 2007, up from £46.4 billion in 2006. Details here.

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Finance ministers and central bankers from the G7, at their meeting in Tokyo, warned of slower global growth but said America should escape recession. This is part of what the G7 - America, Britain, Japan, Germany, France, Italy and Canada - said in their statement.

"In all our economies, to varying degrees, growth is expected to slow somewhat in the short term, reflecting wider global economic and financial developments ... Going forward, we will continue to watch developments closely and continue to take appropriate actions, individually and collectively, in order to secure stability and growth in our economies.”

There were no new initiatives on currencies. The tone of the meeting, which warned of significant downside risks to growth, a view shared by the European Central Bank, suggested that further rate cuts are on the way.

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The Council of Mortgage Lenders has reported that there were fewer mortgage repossessions - the proper word is possessions - last year than feared. It had expected 30,000 but has today reported just over 27,000, with virtually no change between the first and second halves of the year. This may also mean that the 45,000 possessions figure feared for this year is also too pessimistic. Details here.

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The Bank of England duly cut Bank rate from 5.5% to 5.25%, as expected. It emphasised the downside risks to UK and global growth but the upside risks to inflation, particularly in the short term.

Here's part of what the Bank said:

"The prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued. In the United Kingdom, credit conditions for households and businesses are tightening. Consumer spending growth appears to have eased. Although the substantial fall in the sterling exchange rate is likely to promote re-balancing of total demand, output growth has moderated to around its historical average rate and business surveys suggest that further slowing is in prospect. These developments pose downside risks to the outlook for inflation.

CPI inflation, at 2.1% in December, was close to the 2% target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months. And the lower level of sterling will boost import costs. The impact on inflation should begin to fade later in the year, but measures of inflation expectations are currently elevated. These developments pose upside risks to the outlook for inflation further ahead.

Given this outlook for inflation, some slowing of demand growth, by reducing the pressure on capacity, is likely to be necessary to return inflation to target in the medium term. The Committee needs to balance the risk that a sharp slowing in activity pulls inflation below the target in the medium term against the risk that elevated inflation expectations keep inflation above target."

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The Halifax reported that house prices were unchanged last month which, following Nationwide's report of a 0.1% decline, shows rare unanimity among the lenders' measures. Halifax prices were up by 4.5% on a year earlier. Recent data supports the view that there was a Hips (home information packs) distortion to house price indices in the final months of last year, and that November was the point of maximum weakness. But the effect of very weak approvals' data may yet to have come through fully.

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The Federal Reserve lowered interest rates for the second week in succession, cutting the Fed Funds rate by half a point to 3%. Its warning of "downside risks" came after official figures showed annualised growth of just 0.6% in the final quarter of 2007. The Fed's statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today's policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City and San Francisco.

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Mervyn King has been reappointed Bank of England governor for a second five-year term, which was surely the only sensible option. This is the statement:

Her Majesty the Queen has been pleased to approve, under the Bank of England Act 1998, that Mervyn King be re-appointed Governor of the Bank of England for a period of five years when his present term of office expires on 30 June 2008.

Welcoming the re-appointment the Chancellor said:

“I am delighted that Mervyn King has been appointed as the Governor of the Bank of England for a further five year term. He has played a key role in delivering macroeconomic stability in the UK, and his leadership and experience will continue to prove invaluable to the Bank of England."

Among the things King has to cope with is the weakness of the housing market. Mortgage approvals fell to 73,000 last month, down from 81,000 in November, and weaker than the 2004-5 low-point.

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Those who do not like the consumer prices index, the government's target inflation measures - and they include public sector workers (and MPs) now having their pay settled by it - have plenty of ammunition in the ONS's review of 50 years of household spending. It shows the rise in the proportion of household spending on housing, included in the RPI but not, of course, the CPI. Mind you, food has declined in importance. Details here.

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For those who have not seen it, this is Mervyn King's Bristol speech and these are the minutes of the monetary policy committee (MPC) meeting which voted 8-1 to leave Bank rate unchanged at 5.5%. Also today, we have fourth quarter GDP figures which were stronger than expected at 0.6%.

What are we to make of all this? I'll have more to say on rates on Sunday, but a couple of points. Firstly, the minutes. Though the vote to hold was clear-cut (Blanchflower was the only cutter) it was also partly tactical. Back-to-back rate cuts were not warranted, the MPC thought, particularly when money market rates had eased and sterling fallen. There was also concern about "supply-side" inflation pressures.

Second, King's uncomfortable "not so good" combination of slower growth and higher inflation. The governor thinks a 5.5% Bank rate is restrictive and that a lower pound is needed to rebalance the economy. But he is worried that what the Bank sees as a temporary hike in inflation will raise inflation expectations. There's a bit of circularity here - while money market inflation expectations are restrained by higher rates, one factor pushing up public inflation expectations has been higher mortgage costs.

So the Bank isn't following Bernanke's dramatic moves. But King will want to avoid appearing too rigid.

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Ben Bernanke did not even wait until the markets opened. The Fed Funds rate has been cut to 3.5%, getting there several months earlier than expected. Drama indeed. The vote was 8-1, with William Poole voting against. This is what it said:

"The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh. Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.

In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis."

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Equity markets did not respond enough last year to the risks of US recession. This year they have, dramatically, hence the fall since the start of the year and the rout over the past couple of days. Does it tell us there is going to be a world recession? No, or at least not yet. After four years of powerful growth, roughly 5% a year, the global economy will slow, possibly quite sharply, but a recession is highly unlikely. America will be a closer call. Central banks will cut, and probably more dramatically than they would have done.

Watch stock markets, but also watch the oil price. It is down 15% from its $100 peak and is telling us about global growth prospects. In the meantime, what about the role of the ratings agencies? The downgrading of bond insurer Ambac from triple A to AA rating was one of the triggers for the sell-off. The agencies failed to spot problems in sub-prime backed securities on the way up and are now helping push the markets down. Not very impressive.

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Details have been released of the Treasury's financing package, involving the issue of government-backed bonds, for Northern Rock. The aim is to generate competition among potential private sector buyers to avoid accusations of a stitch-up. But the Treasury's press release, here, acknowledges the possibility of nationalisation and says how it might work. More details of the financial package are in the Treasury's statement to the Stock Exchange, here.

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When I wrote about peak oil recently - saying we were nowhere near it - some people responded by saying that a mere economics writer either should not delve into this territory or should bow to the weight of the geological evidence. Well here is the most detailed study of that evidence, from Cambridge Energy Research Associates, and its conclusion is the same as mine; we are a long way from the peak. It sees global liquids capacity, currently 91m barrels a day, rising to 112m bpd by 2017. Its press release is here.

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Retail sales fell by 0.4% last month, in spite of some heavy discounting by stores. Sales in the latest three months showed a rise of just 0.4% on the previous three months. Department stores appear to be having a particularly grim time, their worst since 1994. Details here.

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In a speech Sir John Gieve, the Bank of England's deputy governor, notes that a tightening of credit conditions by banks in the early 1990s led to a 2% drop in GDP relative to what it would have been. Then, he says, the authorities were constrained from cutting interest rates by membership of the European exchange rate mechanism. The question this time is whether the Bank will be constrained by the short-term rise in inflation he also warns of. The speech can be accessed here.

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It may be the lull before the storm, particularly given yesterday's producer price numbers, but consumer price inflation was unchanged at 2.1%. Some interesting details from the ONS, including the fact that clothes discounting in December was less deep than a year ago.

The details:

"Large downward contributions to the change in the CPI annual rate came from:
• Housing and household services due to gas and electricity bills which increased by less than last year when tariff increases were being phased in;
• Furniture and furnishings where the price of kitchen units fell, reflecting discounting on some lines, and prices increased by less than last December across a range of other furniture.

The largest upward contribution to the change in the CPI annual rate
was from food and non-alcoholic beverages, particularly cauliflowers,
tomatoes, onions and cabbages. Bread and cereals and sugar, jam,
confectionery and chocolate also contributed.

A further upward contribution came from clothing and footwear, mainly
due to greater discounting of clothing the previous December, across
a range of men’s and women’s clothing. The largest effect came from
women's dresses.

There was a small upward contribution from miscellaneous goods and
services, mainly due to an increase in mortgage arrangement fees,
within financial services.

Retail prices index (RPI) inflation fell to 4.0 per cent in December,
down from 4.3 per cent in November, mainly due to average mortgage
interest payments where there was a smaller increase than last
December. Fares and other travel increased, due to air fares, which
rose more than they did the previous year. Otherwise the main factors
influencing the RPI were similar to those affecting the CPI.

RPIX inflation – the all items RPI excluding mortgage interest
payments – was 3.1 per cent in December, down from 3.2 per cent in
November."

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The Bank of England's monetary policy committee left Bank rate at 5.5% and, as is customary, issued no statement. The European Central Bank left its key rate at 4% and in the press conference afterwards Jean-Claude Trichet, its president, warned that the ECB was prepared to act pre-emptively to head off inflationary pressures. It's unlikely it will but the upshot was that the ECB gave us a more hawkish "hold" than the Bank, which is still widely expected to cut in February.

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The British Retail Consortium reported that sales in December were up by 2.3% on a year earlier, and by 0.3% on a like-for-like basis. This was the weakest December outturn for three years and reinforced the BRC's calls for an interest rate cut this week. But, again, it was not as dire as earlier warnings from retailers had suggested.

Meanwhile, the Halifax house price index showed a surprise 1.3% rise on the month - even bulls had looked for nothing more than a flat figure. This pushed the "raw" annual rate up to 6.3% in December, from 3.1% in November. However the Halifax prefers to concentrate on the latest three months compared with a year earlier, which showed a dip to 5.2% in October-December from 6.3% in September-November.

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The Bank of England's quarterly credit conditions survey helps confirm why the housing market has been so weak over the past three months. It finds: "Contrary to their expectations in the Q3 survey, lenders reported that the availability of secured credit to households had been reduced materially over the three months to mid-December. They expected a further reduction in secured credit availability over the next three months."

This will be something of a surprise to the Bank, which had thought that weaker demand was the main driver of the downturn in secured lending. Unsecured lending has been less constrained, which explains its recent pick-up. Companies are facing tougher credit conditions. The details are here.

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A veritable feast of data, worth looking at on the ONS website - growth in the third quarter was 3.3%, but the saving ratio fell to 3.4% and there was a £20 billion current account deficit. These figures are subject to revision but they are some way from the rebalancing we have been looking for. Meanwhile, the public finances suggest Alistair Darling is heading for a substantial borrowing overshoot.

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The decision to cut Bank rate from 5.75% to 5.5% earlier this month was, after all, clear cut. All nine members, including the hawks, voted to do it. Financial market conditions had deteriorated, they said, and the medium-term downward risks to both growth and inflation outweighed upward pressures in the short term. Hard to argue with that. The details are here.

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The inflation figures were good, CPI inflation holding steady at 2.1%, despite a surge in petrol prices. Both RPI measures ticked up slightly, RPIX from 3.1% to 3.2% and headline RPI from 4.2% to 4.3%. But the figures were a lot better than they might have been. Details here.

More significant, perhaps, the Treasury extended its guarantee to Northern Rock "at the request of Northern Rock plc, to ... unsubordinated wholesale obligations, whether now existing or arising in the future". The taxpayers' interest in a successful resolution to this affair has just increased. This is the Treasury's statement.

Meanwhile, the Bank conducted its first operation to supply additional liquidity, while Mervyn King hinted that nationalisation is now running ahead of a private sale as the most likely outcome. This is his opening statement to the Treasury committee.

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The public believes that inflation is running at 3.2% and will be 3% over the coming year, according to the Bank of England's latest inflation attitudes survey. Both figures are the highest since the Bank started monitoring such attitudes, and probably reflect rising energy and food prices. It is still the case that inflation expectations are relatively low, lodged some way between the CPI and RPI. Details here.

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The major central banks have announced significant steps to try to address funding pressures in the money markets. Markets have responded favourable. This is the start of the Bank of England's statement:

Today, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing measures designed to address elevated pressures in short-term funding markets.

The Bank of England has already scheduled long-term repo open market operations (OMOs) on 18 December and 15 January. In those operations reserves will, as usual, be offered at 3, 6, 9 and 12-month maturities against the Bank’s published list of eligible collateral. But the total amount of reserves offered at the 3-month maturity will be expanded and the range of collateral accepted for funds advanced at this maturity will be widened.

The total size of reserves offered in the operations on 18 December and on 15 January will be raised from £2.85 billion to £11.35 billion, of which £10bn will be offered at the 3-month maturity.

The full statement is here.

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The outlook for 2008 may be uncertain but so far the job market is holding up well and earnings growth remains subdued. The claimant count dropped by 11,100 last month, while the Labour Force Survey measure dipped by 15,000 in the three months to October. Employment rose by 114,000 over the quarter. Earnings growth, meanwhile, dipped from 4.1% to 4% including bonuses, and from 3.7% to 3.6% excluding bonuses. Details here.

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The monetary policy committee cut Bank rate from 5.75% to 5.5%, the first reduction for more than two years. This is its statement:

"The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.5%.

"Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow. Forward-looking surveys of households and businesses suggest spending is moderating, broadly in line with the projections contained in the November Inflation Report. But conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead.

"CPI inflation was 2.1% in October. Higher energy and food prices are expected to keep inflation above the target in the short term. Although upside risks to inflation remain, which the Committee will continue to monitor carefully, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term.

"Against that background, the Committee judged that a decrease in Bank Rate of 0.25 percentage points to 5.5% was necessary to meet the 2% target for CPI inflation in the medium term."

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The Halifax recorded a 1.1% drop in house prices last month, confirming that November was a very weak month for the market and that the credit crisis is biting hard. It was its third consecutive monthly drop, the first since 1995, and makes the Halifax easily the gloomiest of the main house-price measures. It shows a 2.4% fall over the latest three months compared with a 1.5% rise for the Nationwide. Taking both together, November was bad on all measures and prices are clearly softening. We'll head down over the winter to zero annual house-price inflation.

Taken together with the service-sector purchasing managers' index, which was at its weakest since 2003, there is mounting pressure on the Bank to cut rates tomorrow.

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The Nationwide building society reported a 0.8% drop in house prices for November. Though eye-catching, it followed a 1.1% rise in October - which always looked a bit odd. Taking both months together, prices have flattened, though the Nationwide says prices in the latest three months showed a 1.5% rise on the previous three. House prices are up by 6.9% on a year ago.

Bank of England figures showed a drop in mortgage approvals from 100,000 in September to 88,000 last month. Some had feared a bigger fall on the back of exceptionally gloomy numbers from the British Bankers' Association. Even so, it adds up to a rapidly cooling market, with the credit crisis hanging gloomily overhead. Mervyn King has said this morning that the Bank of England stands ready to provide additional liquidity through to the end of the year.

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The Virgin consortium has emerged as the preferred bidder for Northern Rock and will pay about half Friday's market value to shareholders and immediately pay off £11 billion of Bank of England loans. It looks like a better deal than J C Flowers though critics such as Jon Moulton have already said Virgin will be picking it up too cheaply. In which case, why doesn't he put together a bid himself? Is it better than nationalisation? In my view yes, others may disagree. More details here.

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The Economist has very kindly put its annual crystal ball gazing exercise online. It includes fairly gloomy assessment of the UK and US outlooks as well as a special section on China and the usual mix of the quirky and authoritative. It can be accessed here.

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Rachel Lomax's speech on Thursday has been scrutinised for hints on whether we will get a December Bank rate cut, but offered few hints on timing. But the deputy governor's speech did include some potentially important thoughts on the medium-term outlook for rates.

If we are heading into a sustained period when interest rates available to borrowers will be at a higher margin above Bank rate, the implication could be that Bank rate can be lower to achieve a given amount of monetary restraint. This is how she put it:

"What about possible longer term effects on the price and availability of credit?
Over the past three years, competition and financial innovation have put steady downward pressure on the rates at which banks have been prepared to lend, at any given level of Bank Rate. Between 2003 and the beginning of this year, 2-year-fixed mortgage rates fell by around 50bps relative to the wholesale interest rates they are usually priced off. This is one reason why credit has gone on rising so strongly, despite increases in official interest rates.

"At this stage, we can only speculate about what will happen next. My guess is that over the next 3-5 years, we will see a sustained – though not necessarily complete - reversal in these trends, as banks re-appraise the risks around certain business models and complex financial instruments. This would increase the cost of credit to final borrowers, for any given policy rate." The full speech is here.

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The Bank of England monetary policy committee's vote to leave Bank rate unchanged at 5.75% was clear cut, 7-2, though Sir John Gieve, the Bank deputy governor responsible for financial stability, surprised by joining David "Danny" Blanchflower in voting for a cut. The argument came down to whether the data justified an early cut, which most thought it did not, against whether acting soon might prevent a sharper slowdown, and thus the need for deeper cuts later. There was no obvious indication that the majority view is ready to shift quickly. The minutes are here.

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Northern Rock's shares have fallen again because,understandably, nobody wants to pay much to take it over. The Bank of England has already lent £20-25 billion and the Treasury guarantee to depositors is perhaps a liability of a further £15 billion, making some £40 billion in all.

Why doesn't the government simply nationalise it for £1, as Vince Cable, acting Liberal Democrat leader and some commentators have suggested? After all, the Bank took a specialist lender, National Mortgage Bank, on to its books for £1 in 1994. And the government effectively renationalised Railtrack.

If this option is being considered by the Treasury, and I have no reason to think it is, it should be firmly rejected. To me, if not others, it verges on the bizarre. National Mortgage Bank was first given assistance by the Bank in 1991, its business was then wound down by the simple method of not cutting mortgage rates when those in the economy were tumbling. The company the Bank took on was a shell. That may one day be the case for Northern Rock but we are a long way away from that.

As for Railtrack, a business essentially carrying out transport operations on behalf of the government, this was a case of a recently privatised business being taken back, or rather being given the status of a company limited by guarantee. Northern Rock has never been publicly owned. Nor would the government want to get into the kind of legal and political flak it endured over Railtrack.

As things stand, not only would the nationalisation of Northern Rock for £1 cheat long-term shareholders but it could also mean an substantial increase in the government's liabilities. Would wholesale lenders want to continue lending to the Rock? If not, that liability could get up to £100 billion, all of it on the government's books. So nationalisation should be left where it belongs, in the history books.

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A belated observation on the Bank of England's inflation report, which took most people by surprise with its dovishness. But it appears to have done the trick - 44 out of 51 economists surveyed by Reuters expect a rate cut by the end of the first quarter of 2008. Most expect another by the end of the second quarter.

Is a note of caution in order? Predictions of rate changes emanating from inflation reports do not always come true, most recently in August. Things change. There may also be a presentational difficulty if the Bank is cutting in the context of above-target inflation, which it expects in the first half of next year. That could argue for a very early cut - December - though I did not sense that. Anyway, it was dovish. Further analysis later. The report is here.

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The inflation figures were less of a surprise than they might have been in the light of Monday's producer price numbers and the very obvious upward pressures on food and energy prices. CPI inflation came in at 2.1%, up from 1.8%, RPI inflation rose from 3.9% to 4.2% and RPIX (excluding mortgage interest payments) increased from 2.8% to 3.1%. The ill-timed rise in excise duty on petrol at the beginning of October did quite a lot of the damage. Details here.

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The FT-Acadametrics house price index has the same 12-month increase as the Halifax, 8.9%, but showed a 0.7% monthly rise in October. Confusing.

Meanwhile, Britain's trade deficit widened from £6.9 billion in August to a record £7.8 billion in September. The pound is at $2.11 ...

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There was no sting in the tail after all. Despite some weaker data this week, the Bank of England's monetary policy committee held Bank rate at 5.75%, as generally expected. There was no explanatory statement, with the Bank merely saying that all will be revealed in next Wednesday's inflation report.

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The Halifax reported a 0.5% drop in house prices last month, following a 0.6% drop in September. It was thus in sharp contrast to the Nationwide, which said prices rose by 1.1% in October alone. The truth probably lies somewhere in between, with prices probably flat. In the latest three months, the Halifax measure showed a 0.3% rise on the previous three months. Details are here.

Why the differences in the data? The coverage of the two series is different but the Halifax appears to be more volatile. I'd forgotten that its index showed a 0.9% fall as recently as last December. It last had two falls in a row in 2005. Where the two come together is in suggesting that prices are 9-10% up on a year ago.

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Mervyn King has given an interview to the BBC about the Northern Rock affair and the credit crisis, which is reported here. The story from the interview is that Alistair Darling, not King, blocked the takeover of Northern Rock by Lloyds-TSB before the Rock's troubles became fully public. This, in turn, has been interpreted as the governor trying to shift the blame. That was not my reading of the interview, which was that Darling had the final say but the decision he took was on the basis of King's strong recommendation.

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The Federal Reserve cut the Fed Funds rate from 4.75% to 4.5%, as expected, but suggested that further reductions were by no means a done deal. Part of the reason for that is the inflationary pressure from high oil prices, also emphasised by Charlie Bean, the Bank of England's chief economist.

In his speech, Bean ran through a number of routes in which the credit crisis could impact on growth. But he also noted that the UK economy was starting from a strong position, that the world economy continues to power ahead and that "we cannot afford to relax on the inflation front". As for those credit crisis effects: "It is difficult to assess with any degree of precision the impact on the economy of the recent developments in financial markets." The speech is available here.

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I'd like to be able to comment in more detail on the mess the government has got into over the number of migrant workers in Britain - is it 800,000, 1.1m, 1.5m or more? Is it 40%, more than 50% or 75% of the jobs created in the past 10 years? Here is a well-informed BBC report but finding the source data on the DWP or Home Office websites is a nightmare.

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House prices have jumped by a strong 1.1% this month and are 9.7% up on a year earlier, according to the Nationwide building society. These figures are considerably stronger than expected and a counterweight to some of the gloom of recent days.

This is the Nationwide's interpretation, from Fionnuala Earley, chief economist:

"House prices recorded a surprisingly strong increase of 1.1% in October, tying it with June for the highest month-on-month growth rate so far in 2007. The average price of a typical UK property was £186,044 in October, £16,421 more than the same month last year. The annual rate of price growth picked up from 9.0% in September to 9.7%, but this is still down from a peak of 11.1% in June and was partly driven by base effects.

"The rise in the annual rate temporarily breaks the slowing in price growth we have seen since June, but is unlikely to mark the start of a new upward trend. November and December saw particularly robust gains in 2006, and unless prices perform very strongly for the rest of this year, the annual rate of price growth will resume a downward path. The 3-month on 3-month rate of price growth - which helps smooth monthly volatility - edged up only modestly from 1.7% to 1.9%, which is still below the average of 2.2% seen so far in 2007."

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Here's a link to a well-informed piece on the award of the Nobel prize for economics (the Swedish Bank prize) to Leonid Hurwicz, Eric Maskin and Roger Myerson.

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Gross domestic product rose by a strong 0.8% in the third quarter, boosted by a 1% rise in service-sector output. GDP was up by 3.3% on a year earlier. The numbers are probably too early to show any significant credit crisis effect but they confirm the economy to have been buoyant going into any slowdown. Details here.

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The minutes of the Bank of England monetary policy committee's October meeting show that there was quite a lot of discussion about the possibility of a rate cut and one vote (David Blanchflower) for it. The minutes suggest the Bank may be closer to a cut than members, notably Mervyn King, have suggested in their public comments. The emphasis will be on the November inflation report projections, which may prompt more votes for a cut. Whether that will be enough to swing the Bank towards lower rates before the end of the year is the big question. The minutes are here.

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The run of unexpectedly good inflation numbers continued in September, with inflation unchanged at 1.8%, against expectations of a small rise. Core inflation, at 1.5%, was at its lowest this year. The gap between CPI inflation and other measures continues, however, with RPI inflation at 3.9% (down from 4.1%) and RPIX (exluding mortgage interest payments) up from 2.7% to 2.8% - above its old 2.5% target. Details here.

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Halifax was down, as was RICS. while Nationwide was up. So what really happened to houses prices in September? The FT/Academetrics index, available here, suggests a small 0.3% rise, on the road to stagnant prices later in the year.

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The Bank of England and Financial Services Authority are battling it out over the Northern Rock affair. This is Mervyn King's latest defence of the Bank's handling of the crisis in the credit markets, together with a pretty clear signal that he will not be bending easily when it comes to monetary policy. The speech, delivered last night, is here.

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Alistair Darling did not set the House of Commons on fire with his first pre-budget report - available here - and, to be frank, on first perusal there was not all that much to get excited about in the forecasts and proposals either.

If there is a sharp slowdown/recession coming, the Treasury has not spotted it. After 3% this year, growth will slow to 2% to 2.5% next year, before resuming its previously-forecast path of 2.5% to 3% in 2009, a growth rate that is predicted to continue in 2010. There has been a lot of speculation about consumer retrenchment and an end to the borrowing boom. In fact, the Treasury expects the saving ratio (which is net of borrowing) to stay low; 3.5% this year, 3.75% next year and 4% in 2009. All three numbers were about two percentage points higher (5.5%, 5.75% and 5.75%) in the March budget.

Darling had the excuse of the credit crisis to blame for slower growth, and he used it to raise his borrowing forecasts, continuing the tradition established by Gordon Brown. So net borrowing, £38 billion in 2007-8, is £4.3 billion higher than in the budget, 2008-9's £36 billion is an upward revision of £6 billion, and 2009-10's £31 billion is up £3 billion.

The biggest changes were in the capital taxes. Brown was proud of the capital gains tax (CGT) system he established, with the rate tapering down to 10% for business assets after two years. That has now gone, replaced by a flat 18% rate for all capital gains tax payers, including second home owners. Many businesses will feel they are paying for the excesses of private equity high rollers.

There is also an openly populist move on inheritance tax, allowing transferable allowances between husbands and wives, backdated to cover widows and widowers. That means effectively raising the threshold to £600,000 - and £700,000 by 2010, at an annual cost by then of £1.4 billion. The CGT change will bring in £900m.

That shot two Tory foxes - raising the inheritance tax threshold and recognising marriage (and civil partnerships) - and Darling also lined up another one. George Osborne, the shadow chancellor, proposed a £25,000 annual levy on "non-doms". Darling proposes one of £30,000, although not kicking in until they have been here for seven years.

As for public spending, the overall increase, 2% a year over the next three years in real terms, was in line with the Treasury's previous numbers, though the size of the public spending envelope in cash terms is a little higher. Health gets 4% a year, compared with 7% plus in recent years. Education will receive 2.8% a year, slightly more than expected.

Darling will be criticised for stealing Tory ideas. Some will doubtless claim that the shenanigans of recent weeks were all intended to smoke the Tories' out. I don't think so. And the fact that the government has only now, and belatedly, acted on inheritance tax and non-doms suggests the campaign leading up to the next election will be a long one.

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After all the speculation, there will be no autumn general election after all. A YouGov poll of nearly 1,800 people for The Sunday Times showed the Tories on 41% and Labour 38%, a three-point lead, an astonishing turnaround from Labour's 11-point lead with the same polling organisation a week earlier. An ICM poll for the News of the World in the 83 most marginal constituencies - admittedly based on a smaller sample of just over 1,000 - shows a six-point Conservative lead, 44% to 38%. Both polls suggest that Labour would lose its overall majority in an election. Gordon Brown appears to have decided that discretion is the better part of valour.

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The Bank of England maintained Bank rate at 5.75%, as expected, without issuing a statement. Most data has been reasonably firm, though there was a flurry of excitement ahead of the meeting with the Halifax's announcement that house prices fell by 0.6% last month. The Halifax index is, however, quite volatile on a month to month basis.

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Things are moving quite fast, though we don't yet know quite where they'll end. In the meantime, spare a thought for economic journalists, accountants and the rest, who normally have weeks to gear up for big events like the Comprehensive Spending Review/Pre-Budget Report, but who may now have it sprung on them with unseemly haste.

This is the latest: "The Treasury this morning declined to confirm press reports suggesting that the Comprehensive Spending Review and Pre-Budget Report - two of the biggest events on the parliamentary calendar - have been pencilled in for next Monday. A spokeswoman said only that they would be held in October."

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Richard Lambert has made his strongest speech since taking over as director-general of the CBI, saying that the run on Northern Rock was the kind of thing you would expect to see in a banana republic and attacking just about everybody, including his old monetary policy committee colleague Mervyn King.

"It’s not enough to say, as the Governor did last week, that the main difficulties in fixing the problem had been created by the complexity of today’s company law, and by our system of deposit guarantees,"he said.

"You don’t wait for the cinema to catch fire before you check out whether the fire precautions are going to work."

Meanwhile, the Bank of England has released its credit conditions survey, pointing to tougher times for business, though not yet for consumers. It can be accessed here.

The Nationwide's house price index showed a 0.7% rise this month, up 9% on a year earlier. The Nationwide suggests that this shows the market is shrugging off the credit crunch. It is, however, too early to say.

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Waking up on Thursday to the news of a high-profile departure, my first thought was that Mervyn King must have quit. But no, it was Jose Mourinho [the former Chelsea manager for nonsporting readers], to whom the Bank of England governor must be grateful for relieving some of the media pressure on him. The Bank’s own “special one” remains in place.

This has been an extraordinary week. I don’t want to go into a blow-by-blow account of the twists and turns in the credit crisis / Northern Rock story, which we cover in detail elsewhere. But a couple of things stand out.

The first is that Alistair Darling, the chancellor, has broken his own political rules of engagement. His career has been built on invisible, controversy-deadening competence, but he suddenly found himself with more air time than he was comfortable with. If his hair was not white before, it would have turned it.

His decision to guarantee the deposits of Northern Rock savers, and by implication every saver, calmed the panic. It should have been announced first thing on Monday, having been agreed in principle the previous day but Darling, so far, has emerged pretty well, and with a higher profile.

What about King? Despite a combative performance in front of the Commons Treasury committee, when he blamed regulatory and legislative limits on his freedom of manoeuvre, his credibility has been damaged. Sir John Gieve, one of his deputies, faced the worst of the committee’s flak.

Will King resign? I would be surprised. Will he get a second term when this one expires next year? He has had the equivalent of a football manager’s vote of confidence, Downing Street backing - often the kiss of death. Will he want to carry on? The appeal of a quieter life must be considerable. It could be that we get a Mourinho-style “by mutual consent” departure, though I think it more likely he will carry on.

There are two main charges against King. The first is that he underestimated the scale of the problem. His comments at the August 8 inflation-report briefing, in which he welcomed the repricing of market risk and insisted “it’s not an international financial crisis” speak for themselves. So does his insistence then that “I don’t think there’s any real evidence here of a fundamental challenge to the macro-economic outlook”.

For many of those watching, this was extraordinarily complacent.

The other criticism is over last week’s U-turn, or “swerve”, in providing longer-term liquidity to the markets against a wider range of collateral. Done earlier, could that have saved Northern Rock from having to seek “lender of last resort” help from the Bank? The Bank says no, others say yes. A governor who played it by what he saw as the book and then presided over the first big run on a British bank since the Victorian era still has a lot of questions to answer.

Though this is the Financial Services Authority’s responsibility, analysis by Paul Ormerod and Bridget Rosewell of Volterra Consulting shows that the widening of money-market spreads that undermined Northern Rock can be expected to happen more frequently than the FSA’s stress-tests assume.

The Bank’s supporters worry that the credibility damage will spread to monetary policy. The Bank has maintained public and market confidence in its ability to keep on delivering low inflation. If that is undermined, we are in trouble.

Built on this is another fear. Will the Federal Reserve’s half-point cut in interest rates last week take us down the wrong road, as central banks did towards the end of the past two decades? The relaxation of monetary policy after the October 1987 stock-market crash helped give us the inflation of 198990. The rate cuts after the LTCM crisis of autumn 1998 gave us the final madness of dotcom boom and bust.

As things stand, I can think of as many reasons not to cut UK interest rates as to do so. The economy is not falling off a cliff; retail sales, the money supply and mortgage lending were strong last month. The global economy is buoyant and continues to push up the price of oil and commodities. Would the Bank, in cutting at the prospect of weakness in the housing market, be engaging in a monetary policy version of the “moral hazard” King is so concerned about?

On the other hand, money-market interest rates remain high in spite of last week’s swerve, and represent a tightening of monetary policy, particularly for the 60% of business borrowing directly linked to Libor (the London interbank offered rate). Inflation is below target and wages growth benign. Most forecasters are revising down their predictions of growth for next year in the light of the credit crisis.

We shall see. The issue will come to a head when the Bank undertakes a review of its forecasts for its November inflation report. But this is a fast-moving situation.

While King and his team struggled, somebody else has not covered himself in glory in recent days. Was it sensible, as queues besieged Northern Rock branches, for David Cameron to attack the government for building economic growth “on a mountain of debt”?

Government debt as a share of gross domestic product, just over 38%, is lower than the 43.6% it was when the Tories left office. Even if you add off-balance-sheet financing, Labour has not got back up to the level it inherited.

What about household debt? It has risen, to £1,355 billion, just under the UK’s annualised GDP in the second quarter. This has fuelled the house-price boom but it has not been responsible for consumer-spending growth. Between 1997 and 2006 the level of household disposable income rose by £276 billion, while consumer spending rose £293 billion; the rise in spending has overwhelmingly – 94% – been driven by rising income.

Cameron would have been the first to attack Labour if it had reimposed controls on lending, accusing it of old-style dirigisme.

Conservatives are supposed to believe people are the best judges of their own decisions. Voters already appear to think that Cameron is a political opportunist. He does his best to reinforce that view.

PS: My reference last week to the fact that UK house prices are not 11 times average earnings, not much more than half that, brought a flood of responses, some quite rude. A disturbing number of people believe it. Let me set the record straight.

How about median earnings? In April 2006 the median was £23,244 a year. To be statistically pure you need the median house price, £166,000 in England & Wales in 2006, on Land Registry data. That gives a 7.1 house price-earnings ratio. Against male earnings, £25,324, it is 6.5. These figures are high but they are well below 11.

From The Sunday Times, September 23 2007

If Mervyn King thought the headlines were bad a few months ago when he had to write an open letter to the chancellor explaining why inflation was more than a percentage point above target, they were as nothing compared with what faces him tomorrow morning following the Bank's u-turn in the money markets, and its decision to provide three-month liquidity against the security of mortgage collateral. It's all gone wrong for him - and he has to face a grilling from the Commons Treasury committee.

Even before the Fed's half-point Fed Funds rate cut to 4.75% last night, the Bank of England's monetary policy committee was shifting its stance. The minutes of its September meeting reveal not only a 9-0 vote in favour of no change in Bank rate, as expected, but also a removal of the upside risks it had identified in the August inflation report. Instead, the minutes lay stress on the uncertainty. They are available here.

The much-criticised August 2005 Bank rate cut from 4.75% to 4.5%, when Mervyn King was outvoted in a 5-4 vote, has been blamed for plenty of things. On the narrow point of achieving the desired inflation outcome in two years, which after all is the monetary policy committee's remit, it is hard to fault, however. This morning's inflation figures, showing a further drop from 1.9% to 1.8%, suggest the doves were on the ball. Details of the inflation figures here - the only glitches were a rise in headline RPI inflation from 3.8% to 4.1% (the mortgage rate effect) and the fact that RPIX inflation, at 2.7%, is still above its old 2.5% target.

A lot of people seem to think the house price-earnings ratio is 11 times salary, as Business Week claimed, rather than a still-high 6.5 - 7 times. Here, as reminder, is the calculation.

Here's a link to the median earnings figures. As you'll see, the median in 2006 was £447 a week, £23,244 a year. The median house price in England & Wales in 2006 was £166,000, according to Land Registry data. That gives a house price-earnings ratio of 7.1. To add a further complication house prices have been conventionally measured in relation to male earnings, £487 a week, £25,324 a year, which brings us down to 6.5.

If you're still with me, you'll have noticed that most house price measures are for the average, or mean. Let's take that at £200,000 - it's lower on some measures than others. So what are mean earnings? This release tells us (see p9) that they are £537.30 overall, £27,940, or £591.60, £30,763 for men only. That gives price-earnings ratios of 7.2 and 6.5 respectively; not much different.

Alan Greenspan used to say that if anybody believed they'd understood what he'd said, they must have misunderstood him. I think he's maintained the tradition in retirement. Is he warning that UK house prices will fall and that Bank rate will need to rise into double figures to keep inflation under control? That's what the Daily Telegraph's story says. But it is worth reading the transcript of the Greenspan interview - where you'll see you have to read a lot between the lines to get to that conclusion.

Northern Rock, Britain's fifth biggest mortgage lender, has been propped up by the Treasury and Bank of England, with the support of the Financial Services Authority. This shows how tricky the moral hazard question gets in situations like this. Was Northern Rock irresponsible for expanding its loan book so aggressively, or is it a sound financial institution which has been caught out by unusual market conditions? Discuss. The Treasury statement is here.

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The Bank of England has provided its most detailed response yet on the crisis in credit markets. Other things being equal, the tightening of credit conditions will lower inflation, it says, but the extent of that is so far uncertain. It says that the crisis should not threaten Britain's long-run economic stability. The paper, to the Commons Treasury committee, is here.

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Employment rose to 29.1m, a record, in the three months to July, up 84,000 on the previous three months. The broadest unemployment measure fell by 28,000 to 1.65m. or 5.4% of the workforce. The claimant count, meanwhile, dropped by 4,200 to 852,900. Earnings growth remained benign at 3.5%. Details here.

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The markets didn't need any more bad news but they got it, in the form of a 4,000 drop in US non-farm payroll employment, the first fall for four years. A rate cut by the Fed on September 18 looks guaranteed, and the markets will be disappointed if it isn't 50 basis points. Details of the jobs report here.

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Nobody will have been surprised by the monetary policy committee's decision to leave Bank rate unchanged at 5.75%. Usually in these circumstances the MPC leaves the decision to speak for itself. On this occasion, however, it chose to release a lengthy statement. In summary, it said inflation should remain close to or below the 2% target in the coming months but capacity pressures remain a concern and it is too soon to tell what the effects of the financial turbulence will be. Here's the statement:

"The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 5.75%.

In its August Inflation Report, the Committee’s central projection was for inflation to remain close to the 2% target over the forecast period and for output growth to ease, reflecting a slowing in both consumer spending and business investment.

In recent weeks, heightened concerns about a variety of asset-backed securities have led to disruption around the world, not only in markets for those financial instruments but also in money markets more generally. The MPC’s mandate is to set interest rates to meet the Government’s 2% target for CPI inflation. So the Committee discussed these developments and other economic data in terms of their implications for the outlook for inflation.

CPI inflation fell back to 1.9% in July and may remain around, or a little below, the 2% target for the next few months. Pay pressures remain muted. There are tentative signs of a slowing in consumer spending. But the recent solid pace of output growth has been sustained and the margin of spare capacity appears limited. Indicators of pricing pressure remain somewhat elevated.

It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households. As stated in its August Report, the MPC is monitoring closely the evolution of both credit spreads and the quantities of credit extended, alongside all other data relevant to the outlook for inflation.

Against that background, the Committee judged that no change in Bank Rate was necessary at this meeting to keep inflation on track to meet the target in the medium term.

The minutes of the meeting will be published at 9.30am on Wednesday 19 September."

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Bank rate is steady at 5.75%, where it will surely remain on Thursday, but three-month interbank rate has risen to a nine-year high of nearly 6.8%. The credit crisis has effectively tightened monetary policy, both in terms of the price of money and its availability. What should the Bank do? The last time money market conditions were like this, in the autumn of 1998, it cut interest rates aggressively. We can be sure this will the main topic of discussion at the monetary policy committee's meeting this week.

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Thanks for contributions to the site during my absence - I'll respond to some of them in the coming days. In the meantime, there's the shadow MPC minutes below, and here is a link to Geoffrey Dicks's piece in my slot in The Sunday Times.

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Grant Thornton has generated some headlines with its calculation that household debt, £1,345 billion, exceeds GDP, £1,330 billion. Is it true? The debt figure, for the end of June, is correct, and based on Bank of England data. GDP in the first quarter was £334.5 billion, equivalent to an annual rate of £1,338 billion. But it will have increased between the first and second quarters - last year it did so by 1.3%.

Applying that to this year's figures gives a GDP number, at an annual rate, of £1,356 billion for the second quarter. So is debt greater than GDP? My conclusion is not quite. It is, in any case, only a bit of statistical fun, comparing a stock - debt - with a flow, GDP.

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The Bank of England's monetary policy committee did not even contemplate a rate rise in its meeting earlier this month and members have no view on whether rates need to rise further. That is considerably more dovish than the inflation report, which pointed to a rise to 6%. Perhaps we should have listeneed a little more closely to Mervyn King when he said the inflation report gave no signal on interest rates. Details of the minutes here.

Meanwhile, average earnings growth continued extraordinarily benign - just 3.3%.

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An unexpectedly good set of inflation numbers, including a drop in consumer price inflation from 2.4% to 1.9%, RPI inflation from 4.4% to 3.8%, and RPIX inflation from 3.3% to 2.7%. Details here. The Bank did warn last week of volatility in the monthly numbers, and there will be rises as well as falls in the annual inflation figures in the coming months. But this was good news. Not only that, but if you believe in two-year lags between rate decisions and inflation, it suggests the August 2005 cut wasn't such a mistake after all.

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I'm travelling, and unable to update the site. But you'll find a couple of my pieces on the Times/Sunday Times site. It can be a bit tricky to navigate. If in doubt, click on "Our Papers" in the toolbar and go to the Sunday Times Business section. There's an interview with Andrew Sentance of the Bank of England's monetary policy committee - the headline begins 'Bank hawk ...' and a column 'Grey big spender'. There's also a large piece on market turbulence.

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The Bank of England, in its August inflation report, implied that Bank rate will need to rise once more, to 6%, to achieve the 2% inflation target over the medium-term. But the report implied there is no great hurry to get there - the market interest rate assumption it followed has a 5.9% rate in the fourth quarter and 6% in the first quarter of 2008 - and the tone was quite dovish. The risks to growth are balanced, it said, and the risks to inflation only "slightly" on the upside.

As it is, a 6% Bank rate will deliver inflation slightly below the target at the end of the forecast period, though Mervyn King discouraged people from getting their rulers out, and thereby attaching bogus precision to the forecasts. The message is that the Bank is prepared to act again but also that it is a long way from endorsing some of the wilder interest rate forecasts doing the rounds.

The report is available to read here.

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New figures out today revealed a mixed picture on the extent of the squeeze on the personal sector, admittedly before the full effects of recent rate rises have had time to show through. The number of people becoming insolvent in England and Wales was 26,956 in the second quarter, a drop of 8.1% on the previous quarter but a rise of 4.2% on the corresponding quarter of 2006. The number of Individual Voluntary Arrangements (IVAs) fell 15% between the first and second quarters.

But the Council of Mortgage Lenders has uncovered some new information on repossessions, and estimates that 14,000 properties were taken into possession in the first half of the year, a rise of 18% compared with the second half of last year and 30% compared with the first six months of 2006. The CML's wider sample now includes more UK sub-prime lending, where the repossession problem is thought to be concentrated.

This may explain why the rise in arrears was more modest. The number of mortgages three months or more in arrears at the end of June was 125,100, 4% up on December 2006 but 3% down on June a year ago.

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Given the amount of egg that would have been dripping off faces had the monetary policy committee hiked today, it was as well it left Bank rate unchanged at 5.75%. There was no statement, as is customary, merely a nod in the direction of next week's inflation report, to be published on Wednesday.

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