The Nationwide building society reported a 0.9% drop in house prices in August, following a 0.5% fall in July, the first two-month fall since February 2009. The annual increase edged down from 6.6% to 3.9%. The temporary boost to prices from the reluctance of sellers to sell looks to be over, combined with post-election (and post-budget) worries about the recovery.

The fact that the market is so thin means house price movements have far less impact than in "normal" times. After the surprise rise in prices last year, the prospect is that houses will end 2010 no higher than they started. More here. Meanwhile, the big boost to gross domestic product from construction will not be repeated. The latest purchasing managers' index for the sector showed a drop to 52.1 in August, from 54.1.

There are two explanations for the slowdown in manufacturing growth reported in the latest purchasing managers' index for the sector. One is that exporters are feeling the effect of weaker growth in markets, the other that the kick from inventories is fading. Still, an 11th month of growth and a PMI reading of 54.3, down from 56.9, is a long way from an industrial double-dip, though that, inevitably, is what the headlines will say. More details here.

The National Housing Federation has generated headlines with its prediction that home-buyers who bought at the peak in 2007 will have to wait until 2014 before prices exceed those peak levels and, as they put it, they will have escaped negative equity. The forecast, based on research from Oxford Economics, is summarised here and is actually quite optimistic.

Remember that in the 1990s it took nine years for prices to regain their boom peak; longer in some regions. The NHF forecast is for a modest dip of 3% in 2011, followed by a gradual strenghening. Prices in 2015 will be 22% higher than 2009, it says.

The market has been different this time, partly because of the speed and aggression of the monetary policy response. It took much longer for prices to rise in the 1990s. Even if they slip now, it is from a higher base.

What's the data telling us now? As always the reporting of small prices rises (boom) and small falls (bust) is pretty useless. Bank of England figures for mortgage approvals in July showed a fractional rise to 48,722, from 48,562, against expectations of a small fall. Prices started to rise in the early months of 2009 with mortgage approvals of 40,000 a month, against 120,000 at the early 2007 peak. What level of approvals is consistent with stable prices? Not the 70,000-80,000 that used to be believed, but probably a bit higher than just under 50,000 with increased supply coming through.

Those surprisingly strong second quarter GDP figures just got stronger, with the initial 1.1% increase revised up to 1.2%. The revision had been expected, following strong construction data. Consumer spending showed a 0.7% rise, suggesting the UK consumer is not dead yet. Is this as good as it gets? One weak aspect of the numbers was investment, down 2.4%. These figures are often prone to upward revisions.

More on the second quarter data here. As for the third quarter, it will be surprising if it approaches the second's quarterly rise, though it has begun well. GDP in the second quarter was 1.7% up on a year earlier. Calendar growth of around 2% for 2010, or something close to it, looks perfectly possible.

On Thursday I found myself debating the future of capitalism with Professor John Holloway, author of Crack Capitalism, at the Edinburgh book festival. Given that Edinburgh was in some ways at the centre of the banking crisis, with Royal Bank of Scotland and Bank of Scotland (part of HBOS) now wholly or partly state-owned, it was not the easiest of wickets.

My bottom line was that, while a particular version of financial capitalism produced one of capitalism's periodic manias, panics and crashes, capitalism will survive the crisis. To paraphrase one former prime minister, Winston Churchill, capitalism has many faults but it is better than any of the alternatives. To paraphrase another, Margaret Thatcher, there is no alternative,

Retail sales volume increased by a strong 1.1% in July, though the 12-month rise was a modest 1.3%. Even so, sales in the latest three months rose by 1.7% compared with the previous three months. Food sales were weak, down 0.9% on the three-month comparison, while non-food sales were up by a strong 4.2%. Confidence may be weakening but consumers are still spending. More here.

The news on public borrowing was also encouraging, with net borrowing in July of £3.8 billion, down from £6.1 billion a year earlier. There's a long way to go but it looks as though borrowing is on a downward trend, as the Office for Budget Responsibility has predicted. The question is whether it will prove to be too pessimistic for 2010-11. More here on the figures.

Consumer price inflation dropped from 3.2% to 3.1%, retail price inflation from 5% to 4.8%, and retail price inflation excluding mortgage interest payments (RPIX) also from 5% to 4.8%. Food prices rose but transport (second-hand car prices and petrol) and clothing (down by a huge 4.9% in July), fell. Note, as David B Smith of the shadow monetary policy committee has pointed out, how the consumer prices index has been promoted in the official release here, almost but not quite to the exclusion of the RPI.

The drop in inflation did not spare Mervyn King from having to write his eighth letter of explanation. He will have been reassured by a further drop in CPI inflation at constant tax rates, which is now just 1.3%, down from 1.5%.

I have some spare copies of a couple of my recent books. They are The Age of Instability, The Dragon and the Elephant and Growling Tiger, Roaring Dragon, its North American hardbook equivalent. If anybody is interested, signed copies are available for £8 each, including postage, or two for £15. E-mail david@economicsuk.com.

If there's one way of calming market doubts about the eurozone's long-term existence, it is growth, and there was plenty of it in the second quarter, led by Germany's astonishing 2.2% jump. Even that was not Europe's best: Lithuania managed 2.9%. Of course it won't last, and there are special factors, but it tempers the story about sclerotic Europe being incapable of growing. The Eurostat release showing 1% quarterly growth (1.7% on a year earlier) for both the eurozone and the EU is here.

Meanwhile, construction output for the second quarter in the UK, up nearly 9%, offered the hope of a modest upward revision for Britain's 1.1% second-quarter growth.

The Bank of England revised down its growth forecasts and revised up its inflation projections, as expected, though the tone remained cautiously optimistic. Its growth forecasts, reproduced above, remain higher than many independent forecasters, including the new Office for Budget Responsibility.

The Bank also tried to head off headlines blaming George Osborne's austerity budget on June 22 for the growth downgrade. Though growth was revised lower, this was for a range of factors, Mervyn King said, and the budget would remove one of the downside risks to growth, that of an upward spike in long-term interest rates.

As for inflation, the forecast change here is more marked, and attributed mainly to the budget announcement of a hike in VAT to 20% in January next year. The promised land, of a reduction in inflation to below the 2% target in 2012 and 2013, remains. The inflation report is here, and the inflation chart is below.

The latest labour market data were somewhat mixed. Employment rose by 184,000 in the three months to June and unemployment fell by 49,000 to 2.46 million. But there was a hint of softening in the claimant count, down by only 3,800 to 1.46 million in July.

Britain's global trade deficit narrowed from £3.8 billion in May to £3.3 billion in June, which was a welcome improvement. Buried in the figures is the fact that non-oil export volumes have risen by 14.8% over the past year, exactly what is required. A summary of the overall figures is here.

The Royal Institution of Chartered Surveyors (RICS) says a net 8% of surveyors have seen house prices fall over the latest three months, compared with the net 8% experiencing rises in the three months to June. The read-across from the June 22 budget to the weaker housing market looks perfect, though other factors are also in play, including the abolition of home information packs (Hips), which has resulted in more properties coming on to the market. Compared with the period of intense housing market downturn, when all but a handful of surveyors reported price falls, this is relatively modest. But it points to a softer market in the second-half.

Retail sales also suffered a double backlash, from the World Cup and the budget. Even so, total sales up 2.6% year on year (like for like 0.5%) was not bad for July on the British Retail Consortium's figures, though a little weaker than the June numbers of 3.5% and 1.2% respectively.

Industrial production dropped by 0.5% in June, weaker than expected, because of a drop in energy output, but the quarterly rise in production, 1%, was in line with estimates used for the second quarter gross domestic product figures. So on this basis, no revision to the 1.1% jump in GDP will be needed.

Manufacturing output did better, up 0.3% in June and 4.1% on a year earlier. According to the Office for National Statistics, that rise included some impressive individual gains, including a 12.9% rise in machinery and equipment, and 9% in transport equipment. If there are a couple of sectors you would want to be in they are "manufacture of machinery for the production of mechanical power", up 37.5% and "building and repairing of ships and boats", up 41.3%. Sadly, neither is very big. More here.

There was an unusual amount of speculation ahead of this month's monetary policy committee (MPC) meeting but anything other than a no change decision would have been a surprise. Bank rate was left at 0.5% and quantitative easing at £200 billion. The Bank's statement said just that, with no elaboration, which should be provided by next week's inflation report.

Rebalancing the economy probably means that manufacturing should outstrip services, particularly as industry suffered a larger output fall during the recession. Even so, such is its weight in GDP that a healthy performance from private services is needed for growth reasons. That is still happening, but at a slower pace than before, The service sector purchasing managers' index slipped to 53.1, from 54.4 in June, still consistent with growth but at its slowest pace since June last year.

One area of private sector services is buying and selling houses. Ahead of the latest Halifax house price index, you would have got pretty narrow odds on a monthly fall. In fact they rose by 0.6% in July, and were 4.9% up on a year earlier. Despite this, prices are plainly flattening out.

UK manufacturing went a long way down in the recession but is showing a decent climb back in the recovery. The latest purchasing managers' index for the sector, 57.3, was slightly lower than June's 57.6 but well above market expectations and showed that the sector is still expanding vigorously. Official figures show 4%-plus growth in manufacturing output over the past 12 months.

That is also the message from the Engineering Employers' Federation, here, which predicts that manufacturing growth will easily outstrip the wider economy this year and next.

Evidence of a weaker housing market has been building for some time. Monthly mortgage approvals, after rising strongly to late 2009, have been consistently below those peaks this year. At first it looked like a combination of winter weather and the ending of the stamp duty concession, now it just looks like weaker demand coupled with restrictions on mortgage availability.

The unusual weakness of supply last year has also abated, helped by the new government's decision to abolish home information packs (Hips). Last year's low level equilibrium in the market - weak demand but even weaker supply - has been replaced by something more normal, though still a long way away from peak activity.

So prices have softened on most - not all - measures. July's 0.5% fall on the Nationwide Building Society measure, reducing the annual rate from 8.7% to 6.6%, is its first monthly fall since February. Prices are still up 4.5% this year but this can be expected to flatten further in the coming months. More here.

It was always likely that at some stage there would be a surprisingly large quarterly jump in GDP, partly as a result of the reversal of de-stocking, and this looks to have been it. GDP jumped by 1.1% in the second quarter, about double what the markets were expecting.

Growth was strong across the board, with services up 0.9%, within which business services and finance rose by 1.3%, government by 0.9% and distribution, hotels and restaurants by 0.7%. You have to feel sorry for transport, storage and communication, which fell by 0.7%. Total production output rose by 1%, despite a drop in electricity, gas and water supply. Manufacturing jumped by 1.6%. The star of the show, however, was construction, up 6.6%.

I mentioned recently that the numbers were starting to point towards growth in 2010 being closer to 2% than 1% and these figures confirm it. Whether they are a game-changer in terms of interest rates remains to be seen. I suspect most MPC members will want to see a little more evidence that this can be sustained. More on the figures here.

After Ben Bernanke's testimony yesterday, and an equally cautious interview in The Independent from Spencer Dale, the Bank of England's chief economist, some reassuring data were needed. The retail sales figures provided it, with a rise in volumes of 0.7% in June, for a 1.7% increase on the quarter. World Cup or not, this was pretty strong. More here.

Also today, car production in June showed a 28.6% rise compared with June 2009 and even Europe joined in the fun. The eurozone composite purchasing managers' index showed a rise to 56.7, consistent with stronger growth.

As expected, Andrew Sentance again voted for a quarter-point increase in Bank rate at the July meeting of the monetary policy committee (MPC). As also expected, he was a lone hawk, the other seven members of the MPC opting to leave interest rates unchanged. The MPC will be back to full strength for its August meeting.

Less expected was that the MPC also gavce some consideration to an easing of monetary policy, presumably through some further quantitative easing, before opting to do nothing. This is the key passage from the minutes:

"The Committee considered arguments in favour of a modest easing in the stance of monetary policy. The softening in the medium-term outlook for GDP growth over recent months would put further downwards pressure on inflation, once the impact of temporary factors had waned. Pay growth had remained subdued and there was little sign of a material pickup in medium-term inflation
expectations. A further modest monetary stimulus would act to offset the softening in demand prospects and make it more likely that the inflation target would be met in the medium term.

"But there were also arguments in favour of a modest tightening in the stance of monetary policy. Inflation was likely to remain above target for some months and there was a risk that medium-term inflation expectations would rise. The resilience of inflation over recent months had suggested that the downward impact of spare capacity could be weaker than expected and this created uncertainty around the extent to which inflation would fall back in the future. Demand growth had bounced back internationally, although the geographical distribution remained uneven. The average growth rate of the main measures of UK nominal demand in recent quarters had been around or above historical rates.

"On balance, most members thought that it was appropriate to leave the stance of monetary policy unchanged." The minutes are here.

The latest numbers for the public finances were a touch disappointing. Though overall borrowing in June, £14.5 billion, was marginally lower than in June 2009, the current budget deficit rose from £11.9 billion to £12.6 billion. I would still expect an undershoot of the official £149 billion forecast for 2010-11 but the figures are a reminder that the path to lower borrowing will not be a smooth one. More details here.

Private borrowing, and lending, remains weak. Though the Council for Mortgage Lenders reported a sizeable jump in gross mortgage lending in June, up from £11.4 billion in May to £13.1 billion, the Bank of England's latest Trends in Lending report continued to be downbeat.

It says: "The flow of net lending to UK businesses remained negative in May, and was more so than in April. Credit availability to businesses overall increased, but by less than lenders had expected, according to the Bank of England’s 2010 Q2 Credit Conditions Survey. In recent discussions, most major UK lenders reported that spreads over reference rates on new lending to large businesses had levelled off after recent declines. The Bank’s network of Agents reported that demand for credit remained muted." More here.

The July minutes from the Bank of England's monetary policy committee should make interesting reading. We know there will be one vote for a hike, from Andrew Sentance. There are unlikely to be others but the tone of the minutes will be important. Sentance's view was set out in an entertaining speech, with a bit of a Led Zeppelin theme, available here.

The counter argument has been a little woolly, usually along the lines of the Bank being uncomfortable with above-target inflation but reasonably contfident - though not completely - that spare capacity will bring it down. A fuller argument was provided by David Miles, another MPC member, in a speech in Bristol.

Firstly, on why were rates reduced so much: "I believe it has been right to loosen aggressively the stance of monetary policy because of the scale of the deflationary and recessionary forces unleashed by the remarkably rapid downturn that followed the crisis in the banking sector. This crisis intensified dramatically in the autumn of 2008 when the banking system came close to total
collapse. That would have been an outcome comparable in its impact to the failure of the system for electricity supply."

As to why rates should stay low: "Since I joined the MPC just over a year ago I have not voted to increase interest rates – despite the fact that inflation has more often than not been above the target.

"But even though price rises over the past year have been running at relatively high levels, the underlying domestic inflationary pressures are not strong. Wage rises – despite a move up in household inflation expectations – remain low. Without a pick up in wage inflation I find it hard to think it at all likely that inflation being significantly above target is sustainable. Of course wage pressures may build significantly over the next year or so, though I do not believe this is the most likely outcome.

"And risks of an extended period of low growth – which would further weaken those pressures – are real. In talking about the possibility of an extended period of low, or no, growth I may sound blasé about inflation risks. But the point about risks is that more than one can exist. There are risks that inflation stays well above the target level; there are also risks that demand in the economy falls even more below supply capacity so that inflation further ahead drifts below the target.

"In considering how to balance these risks there is a need to look through short run and potentially transitory factors. Reacting to today’s inflation rate (which reflects where the level of prices is now relative to 12 months ago), rather than where inflation will be looking ahead, is not the right thing to do. The inflation rate can move a lot in a short period. Inflation was barely 1% less than a year ago."

Miles's speech is here.

The counterpart to the smaller than expected drop in employment during the recession was a sharp drop in productivity growth. As economic growth returns, that is now starting to correct itself and productivity growth is resuming. Whole economy productivity growth was 0.6% in the first quarter, after 0.7% in the final quarter of 2009. Significantly, annual productivity growth turned positive, by 1.3%, after a 0.9% annual fall in the previous quarter.

There was a particular impressive set of productivity numbers for manufacturing, with productivity growth up 3.7% in the first quarter for an annual increase of 7.5%. More here.

The news on corporate profitability was less good, down to 11.1% in the first quarter from 11.3% in the final quarter of 2009. The average rate of return in 2009 was 11.6%, down from 14.3% in 2008. Not bad perhaps for the worst recessionary year in the post-war period. More here.

An encouraging set of job market data, which will have come as little surprise to readers of this site. Even last month it was clear that an apparent rise in the Labour Force Survey measure of unemployment was a statistical illusion. The latest figures show a 34,000 quarterly drop in LFS unemployment to 2.47 million, or 7.8% of the workforce, and a 160,000 rise in employment. More here.

A server problem seems to have removed some posts from the site, including Tuesday's inflation figures, Monday's GDP revisions and a link to Sunday's piece: Lord Break Up the Euro But Not Yet. Apologies.

Martin Weale, director of the National Institute of Economic and Social Research, has been appointed to fill the vacant slot as external member of the Bank of England's monetary policy committee (MPC). Weale tussled with the previous government over the "golden rule" for fiscal policy, before the crisis and recession blew both Labour's fiscal rules away. He also developed the National Institute's monthly GDP estimates. The last National Institute quarterly review, in April, predicted a rise in unemployment to 2.7 million in 2011, and weaker growth than the Office for Budget Responsibility expects, even before the emergency budget.

He joins at an interesting time. Inflation is above target and there are hints of a slowdown in growth. The latest purchasing managers' index for services slipped from 55.4 to 54.4, against market expectations of 55.0. Still growing, but at its weakest pace for 10 months.

By any normal standards, a purchasing managers' index of 57.5 for manufacturing is strong, though it was slightly down on the 58 levels recorded in both April and May. Markit, which produces the data, notes a sharp slowdown in export orders, probably because of the eurozone's difficulties. This is one to watch.

Meanwhile, the Bank of England's Credit Conditions Survey showed subdued demand and supply of credit, for both households and businesses. It also showed a drop in default rates in the latest three months, some of it unexpected. More here.

Plenty for economy watchers to get their teeth into today. Business investment staged a strong recovery in the first quarter, rising by 7.8%, though such was the scale of the fall last year that this left investment 7.7% lower than in the first quarter of 2009. Whatever the reason for the delay in the official GDP figures, this was not it. More here. Meanwhile, the Nationwide said house prices rose by a mere 0.1% this month, confirming the flattening trend long predicted here.

An excellent story in The Guardian comfirms the headwinds the economy faces, and the extent to which private sector employment will have to grow to offset the loss of 1.3m public sector related jobs.

Two speeches by Bank of England monetary policy committee members add to the mix. Paul Fisher addressed directly the overshoot in inflation and seems in no hurry to respond to it. Adam Posen, meanwhile, talked of the dilemma between monetary policy that is loose enough to support the tentative recovery but at the same time is allowing an upward creep in inflation. His warnngs of a possible double-dip will get the headlines.

The Bank of England's Financial Stability Report, published twice-yearly, will take on a greater importance in the new era, as it should have done in the old. The highlights of the latest are that there has been a huge balance sheet adjustment - UK households saved more than they borrowed last year for the first time on record - but that this is no time for complacency, either in the banking system or elsewhere.

There are strains arising from eurozone sovereign debt worries, from the banks' own refinancing needs and from other factors, raising doubts about whether lending will be strong enough to support the recovery. This is its summary:

"The financial system has been significantly more stable over the past six months, underpinned by the authorities’ sustained support for the banking system and monetary policy measures. Low risk-free interest rates and reduced uncertainty among investors have led to a rebound in a range of asset prices. Activity in many capital markets has resumed, reducing financing risks for some
borrowers. The market rally has boosted bank profits and lowered concerns about potential future losses, and banks have raised further external capital. As solvency concerns have eased, banks have been able to issue unguaranteed term debt, helping them to reduce their reliance on short-term funding.

"But overstretched balance sheets will take time to adjust fully. Around the world, a number of borrowers, including in the commercial property sector, have large refinancing needs in the coming years. And while funding costs remain low, there is a risk of market participants building excessively risky positions, which could unwind abruptly when yield curves eventually rise. Banks need to reduce leverage further, extend the maturity of their funding and refinance substantial sums as official sector support is withdrawn. While their profitability is relatively buoyant and market conditions are broadly favourable, banks should take the opportunity to do so. That will reduce the risk of disruption to the flow of credit in the future." The report is here.

Andrew Sentance expressed some of his concerns about the resilience of inflation and the muted impact of spare capacity on it in a piece for The Sunday Times 10 days ago. Even so, he suggested that the interesting debates would come in the second half of the year. Instead, they have already started. He votes for a rate hike earlier this month, the first monetary policy committee member to do so since August 2008. The result was a 7-1 vote for no change (the MPC is temporarily down to eight members).

The minutes are here. This was Sentance's worry: "For one member, developments over the past month were consistent with a pattern which had been developing over the past year. Inflation had proved resilient in the aftermath of the recession, casting doubt on the future dampening impact of spare capacity on inflation. Demand had recovered at home and abroad, and the average growth of the main measures of UK nominal demand in recent quarters had been above typical pre-recession rates. Despite current uncertainties, for this member, it was appropriate to begin to withdraw gradually some of the exceptional monetary stimulus provided by the easing in policy in late 2008 and 2009." The other seven seemed happy to bide their time, concerned about downside economic risks.

The big announcements in George Osborne's emergency budget were a hike in VAT from 17.5% to 20% on January 4 next year, welfare cuts building up to £11 billion a year by 2014-15, and a public spending "envelope" that implies real departmental spending cuts for non-protected areas of 25% over the next four years.

Nobody will have been much surprised by the VAT hike, despite one or two last minute suggestions that it might have been limited to one percentage point, or shelved altogether. A big chunky tax hike was needed and the VAT rise, which will raise an extra £13 billion a year by 2014-15, provided it.

Retailers have not welcomed the VAT rise but for business overall this was a pretty good budget. Corporation tax will fall every year for the next four years, taking the main rate down from 28% to 24%. The small company rate will drop from 22% to 20% next year. The rise in capital gains tax on non-business assets, which many were concerned about, will be limited to 28% for higher rate taxpayers - said by the chancellor to be the maximum that could be levied without damaging revenues on the basis of Treasury simulations. Businesses will have also welcomed the fact that, aside from this year's £2 billion cut, there will be no further reductions in capital spending.

The fiscal tightening implied by this budget, £40.2 billion by 2014-15, is huge, and on top of that planned by Labour. Eventually, it splits 77%-23% between spending cuts and tax hikes, though in the early years more of the burden is on tax hikes. In 2011-12, for example, the split is 57% spending, 43% tax. Nonetheless, it builds up to meeting the govenment's new fiscal rule - eliminating the structural current budget deficit and having a declining path for public sector debt as a percentage of GDP by the end of the parliament. Public sector net borrowing is predicted to fall from £149 billion this year to £20 billion by 2015-16, by which time government spending will be below 40% of GDP (39.8%).

Those are the forecasts from the new Office for Budget Responsibility (OBR), and they are tied to what is an optimistic set of economic predictions, despite the tightening. Short-term growth is marginally lower, at 1.2% this year and 2.3% next, but picks up to 2.8% in 2012, 2.9% in 2013 and 2.7% in 2014 and 2015. The OBR insists the new forecasts are not directly comparable with those produced ahead of the budget. Employment is predicted to rise and unemployment fall, despite these predictions. There is no hint of anything remotely approaching a double-dip. If it all goes wrong, maybe the OBR will get the blame. Much more here.

Today's Sunday Times piece is about Tuesday's budget and the extent to which a big fiscal consolidation can occur without damaging the recovery. There is also something about Professor Gary Becker. Now that the paywall has been erected, it is only available to subscribers, at www.thesundaytimes.co.uk.

Not so long ago every month brought new horrors on the public finances. Now they are getting better, though there is a long way to go. Public sector net borrowing in May, £16 billion, was down on the £17.4 billion of May 2009. Net borrowing for April-May combined was £1.9 billion lower than a year earlier. Revenues appear to be picking up quite strongly/ Borrowing for 2009-10 has again been revised lower, to £154.7 billion. More here.

Consumer confidence may have weakened but shoppers are still shopping, according to the latest official retail sales figures. They showed a rise in sales volume of 0.6% between April and May (and 2.2% on a year earlier). The chart produced here by the Office for National Statistics suggests sales have shrugged off the January VAT rise.

In his Mansion House speech, here, George Osborne set out what was pretty much Conservative policy on the shake-up of the regulatory system. The Financial Services Authority will cease to exist in its present form, most of its responsibilities for regulating banks and other institutions becoming a division within the Bank of England. Hector Sants, the FSA's chief executive, will become a deputy governor of the Bank and the changes will take full effect by 2012.

At the same event Mervyn King warmly welcomed his new responsibilities, while suggesting that he is in no hurry to raise interest rates, stressing spare capacity, the weakness of money supply growth (1%) and of earnings (2%). Above-target UK inflation largely reflected past falls in the exchange rate, he said. His speech is here.

You may see some reporting of the latest unemployment figures suggesting a rise of 23,000 to 2.47 million in the wider Labour Force Survey measure of Britain's jobless. In fact, since the total was 2.51 million a month ago, this measure is on the way down again, while the claimant count, down 30,900 to 1.48 million in May, continued its improvement.

Employment rose marginally in the February-April period, by 5,000 to 28.86 million, though this was not enough to prevent a fall in the employment rate of 0.1 to 72.1% because of a growing workforce The unemployment rate also edged up 0.1 to 7.9% on the quarter but was down from the 8% reported a month ago. It is either at or very close to its peak.

The best guide to earnings growth, excluding bonuses, showed a 1.9% annual rise in the latest three months, marginally lower than the 2% recorded for the previous three months. More here.

Good news on inflation - for once better than expected, with consumer price inflatrion dropping from 3.7% to 3.4%, RPI inflation from 5.3% to 5.1% and RPIX inflation from 5.4% to 5.1%. The timing of the budget helped - last year saw the budget excise duty increases coming through in May - but these numbers, while still far too high for comfort, will have proved a bit of relief for the monetary policy committee (MPC).

Looking at some of the other measures, consumer price inflation excluding indirect taxes fell from 2% to 1.7%, while consumer price inflation at constant tax rates fell from 1.9% to 1.6%. Goods price inflation and service sector inflation were identical at 3.4%, the first time we have had that for a while. More here.

RICS (the Royal Institution of Chartered Surveyors) said the abolition of home information packs had increased the supply of new properties coming on to the market, but the balance of surveyors reporting higher prices rose from 19% to 22%. The official DCLG measure of house prices rose by 0.4% in April, after 0.7% in March, 10.1% up on the year. But the Council of Mortgage Lenders said the proportion of first-time buyers has dropped to just 35%, the lowest since 2007.

The keenly awaited pre-budget forecast from the Office for Budget Responsibility has been published. As you'd expect from the people involved - Sir Alan Budd, Geoffrey Dicks and Graham Parker - it is a sensible forecast. While it has reduced the growth numbers the Treasury used in the March budget, the OBR predicts a decent recovery - 2.6% next year, after 1.3% this year, rising to 2.8% in 2012 and 2013, before slipping back to 2.6% in 2014. This is forecast most people would be happy with.

True, the OBR has cut the estimate of trend growth to 2.35% (falling to 2.1% from 2014 onwards), compared with the 2.75% used by the Treasury (2.5% for the purposes of the public finances) but its overall forecast, admittedly with a much-stressed margin of great uncertainty illustrated by fan charts, is benign. The economy rebalances away from excessive reliance on consumer spending and government and towards exports and investment. Employment grows. Unemployment peaks soon at just over 8%, then falls back. House prices grow modestly. The likely criticism of the OBR's forecast will be that it is too optimistic, not excessively gloomy.

As for the public finances, this is also a better story than feared. The numbers for net borrowing throughout the forecast period are lower than presented by the Treasury in the March budget, giving substance to Alistair Darling's claim that there was no basis for David Cameron's claim that the public finances were in an even worse state than thought.

Its numbers for borrowing are, going forward from this year, £155 billion, £127 billion, £106 billion, £85 billion and £71 billion. The Treasury's March numbers were £163 billion, £131 billion, £110 billion, £89 billion and £74 billion. The difference is in the structural deficit, where the new numbers, expressed as percentage of GDP, are 8%, 6.1%, 4.7%, 3.5% and 2.8%, while the old ones were 7.3%, 5.3%, 4.1%, 3.1% and 2.5%.

Remember these numbers do not include the £6 billion of cuts announced for this year by the new government, or any other changes promised in the coalition agreement. Remember too that the government will probably want a number significantly lower than a 2.8% structural deficit by 2014-15. Even so, sensible, not scary. There's a lot more to read in the document, which is here, but that's my first take.

This is the monetary policy committee's Andrew Sentance, writing today in The Sunday Times on inflation:

On Tuesday, inflation figures for May will be released. The last data, for April, showed consumer price inflation at 3.7% — significantly above the 2% target that guides the decisions of the Bank of England’s Monetary Policy Committee (MPC).

Inflation has been volatile, particularly because of changes in Vat and energy prices. But this is the second significant inflation spike in the past couple of years. This is unusual because we normally expect recessions to push down inflation. Yet since the start of 2008, CPI inflation in the UK has averaged 3% — above the 2% target and more than one percentage point above its average in the pre-recession period of growth.

External factors, such as a volatile oil price, have made control of inflation difficult. But if they were solely to blame there would be a similar effect elsewhere. America and the eurozone have seen lower and more stable inflation, averaging about 1.75% since early 2008. Higher petrol prices have pushed up inflation in America, but to a much lesser extent than in Britain.

So how do we account for the unusual behaviour of UK inflation? In my view, two main factors are at work. The first is the pound’s weakness. Since the middle of 2007, sterling has fallen about 20% against the euro and nearly 30% against the dollar. This has generated more upward pressure on import prices in our economy than elsewhere.

But there appears to be a domestic component. The GDP deflator captures the contribution to inflation of wages, profits and expenditure taxes. Since the recovery started around the middle of last year, it has risen by 5% at an annualised rate. This is about twice its normal rate and the biggest jump over three quarters since the early 1990s.

The rise in Vat can only explain a small part of the increase in inflation. It appears that instead of pushing down significantly on cost and price increases, the impact of spare capacity on domestic inflation has been muted.

It is true that wage growth fell back sharply last year, as many companies imposed or negotiated pay freezes. But it also appears lower wage growth was used by companies to help offset the impact of weak demand on profit margins, rather than being passed on into prices. We could see the impact of lower wage growth on inflation with a lag, and this partly underpins the Bank’s forecast that inflation is likely to fall back to target and drop below it over the next year or so.

But wage growth is picking up as the labour market stabilises and some firms start to recruit. In manufacturing, underlying pay growth is back to a pre-recession 4%-5%.

So there appear to be more fundamental reasons why spare capacity has failed to exert much downward pressure on inflation.

One candidate is the anchoring of expectations to the inflation target, despite a big downward shock to demand in late 2008 and early 2009. The MPC’s actions helped head off a downward shift in inflation expectations.

But there is now a challenge from the other direction, as surveys point to some upward pressure on public inflation expectations. There also appears to be less spare capacity in the economy than many had feared.

Unemployment has risen to a lower level than at this stage of the economic cycle in the early 1980s and early 1990s — it is at 8% of the labour force rather than 10%. The latest CBI survey shows 62% of manufacturers reporting spare capacity, in line with the average for the decade before the crisis. This evidence is hard to square with the drop in GDP figures, though these could be revised.

A third factor is the rapid turnaround in nominal demand. Since the middle of last year, all the main measures of spending in money terms have grown at close to an annualised rate of 6% or more — above their trend growth rates for the decade before the recession. This bounce in demand reflects a recovery in confidence and the strong stimulus monetary policy provided by cutting interest rates to 0.5% and injecting £200 billion into the economy through quantitative easing. Though real GDP has turned round more slowly than money spending, surveys suggest activity is gaining momentum.

In late 2008 and through 2009, the MPC put in place a highly expansionary monetary policy to offset the sharp contraction in demand driven by the financial crisis. However, the recovery in the economy and the resilience of inflation highlight the issue of how long such an expansionary policy will remain appropriate.

As spare capacity has not exerted much downward pressure on inflation so far, there must be a high degree of uncertainty about its future impact. And though some headwinds to growth will remain — including deficit reduction and weakness in some eurozone economies — these can be offset by growing confidence and momentum from private-sector demand, as in the 1990s recovery.

This will make for some interesting debates on the MPC in the second half of the year.

From The Sunday Times, June 13 2010

The Bank of England has said it will be concerned about a rise in inflation expectations and a rise in inflation expectations is what we have. Respondents to the Bank's inflation attitudes survey, carried out by GfK-NOP, think inflation will be 3.3% over the next 12 months, compared with 2.5% the last time the survey was done, in February.

Though this is a significant rise it is lower than current inflation (3.7%) and below levels it reached two years ago. In August 2008, before inflation's sharp fall, expectations on this measure reached 4.4%. The Bank's monetary policy committee will have had this information in agreeing to stick with Bank rate at 0.5% on Thursday. More here.

Also, both manufacturing and overall industrial production slipped in April following strong March rise, but are still showing healthy annual gains and should contribute to good growth in the second quarter. More here. Output price or 'factory gate' inflation slipped to 5.7% in May from 5.9% in April. The core measure edged down from 4.5% to 4.4%. That release is here.

The noon announcement from the Bank of England that will not have surprised many people:

"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 maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion."

Next week's inflation figures and the August inflation report may be a little more interesting.

The trade deficit in April, £3.3 billion, was marginally worse than in March, £3.2 billion, though that was originally reported as £3.7 billion and put some pressure on sterling at the time. In reality, the deficit appears to be stuck at around £3 billion a month, which is disappointing in the context of sterling's highly competitive level vis-a-vis other currencies. Exports and imports both slipped in April, part of which may have been due to the ash cloud. More here.

The shape of the upcoming fiscal analysis and announcements is becoming clearer. On Monday the new Office for Budget Responsibility will publish a pre-budget assessment of the outlook for the economy and the public finances on Monday June 14. The growth forecasts are likely to be lower than those used by the Treasury in the March budget and the pace of the reduction in borrowing consequently gentler. Then, just over a week later, the chancellor will come along with his budget announcements and we should be able to see the difference. The budget will certainly reduce the borrowing profile, the question will be whether it cuts growth as well.

Meanwhile, George Osborne has set out the principles underlying the coming spending review. Britain's "brightest and best" will be employed in the effort to ensure that the public sector only does what it needs to, along the followig principles: Is the activity essential to meet Government priorities?
Does the Government need to fund this activity?
Does the activity provide substantial economic value?
Can the activity be targeted to those most in need?
How can the activity be provided at lower cost?
How can the activity be provided more effectively?
Can the activity be provided by a non-state provider or by citizens, wholly, or in partnership?
Can non-state providers be paid to carry out the activity according to the results they achieve?
Can local bodies, as opposed to central Government, provide the activity?

It sounds bold and exciting and there is more here. Will it work, or has the government got too many spending sacred cows? We'll soon know. Meanwhile Fitch, the ratings agency, got the markets excited by saying that cutting the deficit will be very tough. I think we knew that.

The really impressive thing about the new OECD forecasts are the numbers for world trade. It slumped by 11% last year, easily a post-war record, but is predicted to grow by 10.6% this year and more than 8% in 2011. Given the risks of protectionism when the global economy was falling off a cliff, this is a great outcome. More on the new forecasts here.

In the grand scheme of things, with markets in turmoil, a small upward revision in Britain's first quarter GDP growth from 0.2% to 0.3% does not mean that much. Still, it is a step in the right direction, and won't be the last such revision. Consumer spending was flat and service sector growth slipped from 0.5% to 0.2%. Exports also stagnated, while imports rose by 1.4%. Some of these numbers should look a little better in the second quarter. More here.

In opposition the Conservatives promised to find £12 billion of efficiency savings in the first year, plough half of them back into "frontline" services and end up with a net £6 billion of cuts. In the event, the coalition has found savings of £6.2 billion, ploughed £500m back, to be left with a net £5.7 billion.

Are they efficiency savings? The Treasury's press notice calls them waste, but is a freeze on most civil service recruitment cutting waste, or just cutting numbers? Most of the rest appear to be cuts in programmes or contracts. That's no bad thing, but it is sensible to be honest about this from the start. These cuts won't derail the recovery, though using them to defer planned tax increases next year means the upcoming spending review has to work that much harder. More details here.

The new government's economic inheritance just got better. Back in December, the Treasury preducted public sector net borrowing for 2009-10 of £178 billion on the definition it uses. The latest figures from the Office for National Statistics show a downward revision to the outturn, taking it to £156 billion. This is still a big number, 11.1% of GDP, but there are good reasons to believe it is improving. At one time people were predicting figures as high as £220 billion for 2009-10. There's a problem to tackle but the size of has gone down by more than £20 billion in the space of 4-5 months. More here.

To add to the good news, business investment in the first quarter rose by an impressive 6%. It was led by private sector non-manufacturing, which is unusual, though manufacturing cn be expected to follow suit. It has been a grim time for business investment but this is a light at the end of the tunnel. More here.

The ban on short-selling by the German authorities has added to eurozone jitters - a great example of policymakers shooting themselves in the foot - and the Bank of England's latest minutes show that worries about the eurozone were high on the monetary policy committee's agenda.

The May meeting was Kate Barker's last, after nine years on the committee, and has the roots of a future split on policy. While nobody on the MPC is comfortable with inflation so much above target, there are differences of view on the extent to which spare capacity will bear down on inflation. It remains an open question about whether Bank rate will rise before the end of the year but it is highly unlikely that we will get throough the next few months without at least some votes for higher rates. The minutes are here.

The Bank of England did not appear too concerned about inflation last week in presenting its quarterly inflation report, but the numbers have to start coming down soon. The April rate for consumer price inflation, up from 3.4% to 3.7%, should represent the peak, though there are significant uncertainties such as the timing of any VAT hike and other tax nasties, though these should not properly be regarded as inflationary.

CPI has risen from 1.1% in September to 3.7% now and the Bank will be hoping its reversal is just as dramatic. RPI inflation has gone from minus 1.4% to 5.3%. RPIX, the retail prices index excluding mortgage interest payments, is now at 5.4%, more than double its old target of 2.5%. CPI is a long way from its 2% target. More here.

The governor's letter to the chancellor, his first to George Osborne, is here. And this is Osborne's letter, referring to the inclusion of housing costs in the target measure at some stage.

Before the election, there was a debate amopmng specialists about how much power the Conservatives' Office of Budget Responsibility would have. Would it merely monitor and comment on the Treasury's growth and fiscal forecasts or would it do those forecasts itself? In the event, the new chancellor George Osborne has gone for the latter, which is at the bolder end of the spectrum.

Sir Alan Budd (above), the interim head of the new OBR, will take responsibility for the forecasts and for setting out the fiscal challenge the new chancellor and David Laws, his Liberal Democrat Treasury chief secretary, will have to meet. It is radical, though we should remember that Sir Alan is a former Treasury chief economic adviser and that he will have to draw on the Treasury model and its forecasting expertise in producing his numbers.

My sense is that Treasury officials were not leaned on to produce over-optimistic forecasts in the run-up to the election - their £178 billion public borrowing projection for 2009-10 was £15 billion too high. They also worked hard to produce a big figure for the "structural" deficit. Anyway, we'll see what the new approach brings. Too gloomy and it could scare the markets.

Less clever are proposals to bring the private finance initiative and unfunded public sector pension liabilities into a transparent "national balance sheet". Every country has unfunded pension liabilities and in many cases they are very considerably larger than in the UK. The danger is that UK government debt is made to look worse than it is. International comparability is the key here.

Details of £6 billion of "in-year" spending cuts will be announced next Monday. The first "emergency" budget will be on June 22. George Osborne's speech is here.

Sterling has not responded that enthusiastically to the coalition government and the latest trade figures will not help its cause. The goods and services deficit widened dramatically to £3.7 billion in March, from £2.2 billion in February. The figures may be revised but there's still some way to go before Britain's recovery can be said to be led by net exports. More here.

Rarely has an inflation report press conference been so dominated by fiscal policy as this one. The new government asked Mervyn King, the Bank of England's governor, for his view on its outline fiscal plans and he very much approved. He thinks an in-year fiscal tightening (£6 billion of spending cuts) is needed, as is a more aggressive profile for cutting the budget deficit.

King. whose language on fiscal policy was always somewhat coded before the election, distanced himself from the suggestion that he believed the necessary fiscal measures would be so unpopular as to be politically suicidal. He said the need for urgent action and getting ahead of the markets had been underlined by the Greek and wider eurozone fiscal crisis. The inflation report itself had broadly the same message as three months ago - a temporary blip in inflation that will reverse itself as spare capacity bears down. The inflation report is here, and the key charts are reproduced below.

Meanwhile, there was mixed news in the latest labour market statistics, with the claimant count down 27,100 in April to 1.52m but the wider Labour Force Survey measure up by 53,000 in the January-March period to 2.51 million, 8% of the workforce, and employment down by 76,000 to 28.83 million, 72% of the workforce, the lowest since 1996. Though they won't be reported this way, these figures are consistent with an improving labour market, as we will see when February drops out of the LFS numbers. More here.

Those charts:

Manufacturing output leapt by 2.3% in March, virtually guaranteeing an upward revision to the first quarter gross domestic product numbers. Manufacturing showed a healthy 3.3% increase on a year earlier. Production output also rose by 2%, and was 2% up on a year earlier. Both manufacturing and overall industrial production showed 1.2% rises on the previous three months. More here.

Taken together with the latest evidence from the British Retail Consortium that retail sales were disappointing in April (total sales down 0.2% year on year, like-for-like down 2.3%), the figures suggest, whisper it, a bit of rebalancing for the economy.

Fundamental long-term problems remain, but this is an impressive policy response by European finance ministers, the IMF, the European Central Bank and other central banks, as the markets have realised. Lessons have been learned, and there is a colllective determination not to let Greece be a second Lehman Brothers.

The small matter of the UK's undecided election looks insignificant when set against the scale of this response. It also makes the case for the continuity of government in Britain. Though the UK has not signed up to the larger part of the rescue package, it would have been odd for there to have been an empty chair. Instead, in what may be one of his last acts as chancellor, it was occupied by Alistair Darling.

More details here on a package that adds up to as much as $1 trillion, and which has been described as "shock and awe".

PS The Bank of England left Bank rate unchanged at 0.5%, and maintained quantitative easing at £200 billion, as it says here.

Everybody was prepared for a hung parliament but this was about as well hung as it could have been. Labour and the Liberal Democrats together will not have enough seats combined for an overall majority and neither will the Conservatives with their allies in Northern Ireland. Sterling and gilts have suffered, though disentangling the UK election effect from the storms raging around the markets is not easy.

Meanwhile, life goes on. The Halifax reported a 0.1% drop in house prices for April, though they were 6.6% higher than a year earlier. Meanwhile, producer price data gave the Bank of England something to think about. To quote from the Office for National Statistics:

"Output price ‘factory gate’ annual inflation for all manufactured products rose 5.7% in April. Input price annual inflation rose 13.1% in April compared to a rise of 10.3% in March. Month on month the output prices measure for all manufactured products rose 1.4% in April, mainly reflecting price rises in other manufactured products, petroleum products and tobacco and alcohol products. The index excluding excise duties rose 1.3% between March and April.

"The ‘narrow’ output prices measure, which leaves out volatile sectors, showed an annual increase of 4.4%."

Three in a row was a bit too much to ask for and the service sector purchasing managers' index disappointed, slipping from 56.5 to 55.3. Some of this, however, may have been due to special factors, and one factor in particular.

As Markit, which produces the PMI for the Chartered Institute of Purchasing and Supply put it: "Amid some reports that the volcanic ash cloud had disrupted business operations – particularly in the Transport, Storage & Communications sector – the rate of activity growth weakened for a second successive month to the slowest since January’s snow-related low.

"According to respondents, the volcanic ash cloud also undermined new business gains in April, while there were also reports that the forthcoming general election had led to uncertainty amongst some clients. Nonetheless, there were many reports that underlying conditions had improved, creating a generally favourable environment to secure new contracts. Despite easing to a three-month low, overall new business growth was solid."

The dip in the service sector PMI followed a jump in the construction industry index from 53.1 to 58.2, and a strong rise in the index for manufacturing.

Everybody knows the UK has to rebalance, and that includes a stronger performance from manufacturing, which was hit hard in the recession. The latest Chartered Institute of Supply/Markit purchasing managers' index for the sector suggests so far, so good. in April the index rose from 57.3 to 58, its highest level for more than 15 years. Output, new orders (particularly export orders) and employment were all up strongly.

According to Rob Dobson, senior economist at Markit, which produces the data:
“Manufacturers reported a flying start to the second quarter, with the weak pound boosting export growth to the fastest for at least 15 years. The data point to manufacturing output growing by as much as 2% in the latest three months, suggesting the sector will provide a strong contribution to second quarter gross domestic product.

“The sheer strength of the rebound in demand for manufactured goods is highlighted by an unprecedented increase in backlogs of work, the largest for at least 11 years, which in turn has encouraged manufacturers to raise staffing levels to the greatest extent for three years."

What has caused the intensification of the panic in the eurozone? Standard & Poors, in its wisdom, decided to downgrade Greek sovereign debt to junk status and then downgrade both Portugal and Spain. Done at a time of delicate negotiations between the Greek government and the International Montary Fund and eurozone, it is hard to think of a more effective way of throwing a very large spanner in the works.

S & P might argue that its actions have helped put the pressure on the politicians to come up with an early Greek solution. I see them as more like shouting fire in a crowded theatre. The other big agencies, Moody's and Fitch, have so far shown far better judgment.

Ratings agencies helped get the global economy in to this mess, by giving AAA status to dodgy securities and derivatives. At least one of them seems determined to stop us getting out of it.

Annual house price inflation has risen to 10.5% this month, according to the Nationwide Building Society, following a 1% April rise. This is the first time that house-price inflation has been in double figures since June 2007 and represents a remarkable turnaround. The 12-month rate of price rises, up from 9%, was helped by the fact that April 2009 saw a 0.3% monthly fall. Even so, prices are up by 11.6% from their February 2009 low point, though still 10% below the October 2007 peak.

The Nationwide does not think double-digit house price inflation will be maintained for long, given that it would require monthly prices rises to be as big this year as last, and neither do I. More here.

I can't remember the Institute for Fiscal Studies having such a prominent role in an election before, so congratulations to Robert Chote, its director, for turning its assessment of the political parties' fiscal plans, or lack of them, into such a major news event. It may, of course, be partly because we haven't had an election for a long time when the need for fiscal consolidation is so pressing.

There isn't much to argue with in the IFS analysis, which can be accessed here. Labour will say it has shown more leg on its fiscal plans than the other parties, though it started the rot be refusing to carry out a comprehensive spending review. The Tories made a step back by saying it would scrap most of Labour's planned National Insurance rise. The IFS exercise is a useful reminder that the Liberal Democrats are not as open and honest as Nick Clegg keeps claiming.

Meanwhile, Germany's foot-dragging on Greek aid has already made a bad crisis worse than it need have been. The eurozone was never meant to be like this. At the moment it isn't working.

Just because the Office for National Statistics started with 0.1% growth for the fourth quarter and ended up with 0.4% (pending further revisions) does not mean its first quarter estimate of 0.2% will be revised up to 0.5% in a couple of months' time. But a preliminary estimate of 0.2% was not bad considering how severely the snow affected the January data and history would tell us that these numbers, indeed most of the recent GDP numbers, will end up significantly higher than now.

Otherwise, there's a hint of rebalancing in these figures, with production output of 0.7% exceeding that of services, 0.2%, though business services and finance were strong in the latter category. Most importantly, the greatest risk of a double dip was in the first quarter, and it has been avoided. More here.

The public finance numbers could be designed to create maximum confusion but the bottom line is that, on the Treasury's definition, public sector net borrowing came in a little below the budget forecast at £163.4 billion, compared with the £166.5 billion officially expected. Fairly small beer, though at least in the right direction, and £15 billion lower than the Treasury was expecting in the pre-budget report in December.

The Treasury might have preferred to focus on the measure including financial interventions, which came in at £152.8 billion. They are all, however, still very big numbers. The preferred measure confirmed borrowing at 11.6% of gross domestic product. More here.

Retail sales, including petrol, showed a 0.4% volume increase in March, for a 2.2% rise on a year earlier. Excluding petrol, the monthly increase was 0.2%. The numbers have yet to get over the January snow-affected slump, however. Including petrol, sales volume was down 1.7% in the latest three months. Even excluding petrol, there was a 0.6% fall. The numbers are here.

It was always going to be difficult to get through the winter without a rise in unemployment, and so it proved. For the claimant count it was a rise in January, while for the Labour Force Survey measure it was the December-February period, which saw an increase in unemployment of 43,000 to 2.5m, the highest since December 1994. Employment fell by 89,000 over the period.

The more timely claimant count numbers have proved to be a better guide to trends during the recession, however, and their 32,900 drop to 1.54m, the fourth fall in five months, tells us that unemployment is still trending gradually lower, once winter effects have dropped out. The claimant count is running at roughly half its level following the past two recessions, confirming that labour market outcomes in this recession have been better. More here.

How twitchy is the Bank of England about higher than expected inflation? Not enough to contemplate an early hike in interest rates but a few doubts are creeping in. Certainly, it would be very odd if the Bank was as open to the prospect of more quantitative easing as in February.

The April minutes say: "Given that a period of above-target inflation was in prospect at a time when monetary policy was exceptionally accommodative, this was a source of concern to some members. The Committee would continue to monitor developments in inflation expectations closely." The minutes are here.

A little uncertainty has been creeping into the Bank of England's view that inflation will head down sharply later in the year and the March numbers will have done nothing to ease it. Admittedly, having to compete with a record 1% fall in the consumer prices index between February and March last year meant that the base effect challenge was huge. Even so, 3.4% consumer price inflation, up from 3%, was worse than expected.

RPI inflation rose from 3.7% to 4.4%. Most dramatic of all was RPIX inflation, up from 4.2% to 4.8%. This measure, excluding mortgage interest payments, used to be the basis of the official target, of 2.5%, so inflation on this measure is almost double its old target.

Inflation on all measures should still fall back in the second half but the March figures mean the starting point for the fall is higher than it might have been. More here.

There was some scepticism about the weather explanation for the poor January trade figures but it appears to have been true. February's deficit narrowed sharply to £2.1 billion (goods and services) from £3.9 billion (marginally revised up from £3.8 billion) in January. Exports looked particularly good, up 6.3% on the month, while imports fell by 1.4%. More here.

Meanwhile, domestic demand looked reasonably robust in March, with the British Retail Consortium reporting a 4.4% rise in like-for-like sales compared with a year earlier. Retailers will always look a gift horse in the mouth, so the BRC attributes it all to the timing of Easter. More here.

Higher oil prices pushed up both input and output price inflation last month, output prices rising by 0.9% on the month and 5% on the year. Even underlying output price inflation was 4%, while input price inflation jumped from 7.5% to 10.1%. With petrol prices at a record high, oil has become an inflation factor again, and the pun was intended in the headline. The pass-through to consumer price inflation will be more muted but will make the sharp reduction the Bank of England is looking for that bit harder. More here.

Both industrial production and manufacturing showed good increases in February, 1% and 1.3% respectively, and both are showing decent 0.8% rises compared with the previous three months. Perhaps most importantly, both point to a Q1 average significantly above the fourth quarter of 2009. Taken together with the British Chambers of Commerce survey and the service and manufacturing purchasing managers' index numbers, a first-quarter double-dip looks to have been comfortably avoided. More here.

The Bank of England, as expected, did nothing, leaving Bank rate at 0.5%.

Capitalism has not collapsed, yet, as a result of the crisis, to the frustration of some. Professor David Harvey of the City of New York Graduate School is a distinguished Marxist who wishes it had. His Marxist take on the crisis is interesting, and he concludes:

"Capitalism will never fall on its own. It will have to be pushed. The accumulation of capital will never cease. It will have to be stopped. The capitalist class will never willingly surrender its power. It will have to be dispossessed."

Some will find the resilience of capitalism reassuring. Others, like Harvey, clearly see it as a call to arms. A different perspective, anyway. The book is here and out soon.

The latest manufacturing purchasing managers' index (PMI) from Markit and the Chartered Institute of Purchasing and Supply suggests the sector is growing strongly. The overall index rose to a 15-year high of 57.2 in March, from 56.5 in February. No sign of a double-dip there.

Meanwhile, the Bank of England's credit conditions survey suggested a a gradual easing in the tightness of credit conditions, though smaller firms are still finding things tough. More here.

The latest gross domestic product figures confirm how revision-prone these numbers are. Two months ago the Office for National Statistics said the UK scraped out of recession in the fourth quarter, by just 0.1%. Now the expansion is 0.4%. Who knows what it will look like in a couple of years' time? Spending in the fourth quarter was supported by a dip in the saving ratio. It dropped from 8.4% to 7%. More details here.

Meanwhile, the Nationwide said house prices have risen by 0.7% in March, almost reversing their 0.8% February fall. It thinks prices are flattening. So do I. More here.

Having promised to get real about the budget deficit and scoffed at Labour's proposed efficiency savings, the Conservatives have shifted ground again. By promising to head off most of the rise in National Insurance contributions planned for April 2011, at a cost of nearly £6 billion, and making up the difference with efficiency savings, the Tories have seriously compromised their "sound finance" message.

Could a Tory party that promised to head off most of a rise in NI go ahead with a post-election VAT rise? Possibly, but it would look very dodgy. As of today, Labour's sketchy plans for cutting the deficit are more credible than those of the Tories. The Tory news release is here.

This is the Institute for Fiscal Studies on the Conservative plans:

"The Government is currently planning to cut public services spending outside the NHS, defence and overseas aid by 2.4% in 2010–11, after adjusting for whole economy inflation. We estimate that the additional £6 billion cut planned by the Conservatives would increase this to 5.1% and would leave these unprotected areas of spending 2.8% below the level planned by Labour. (The figures do not sum precisely because of rounding and we cannot be entirely precise about the declines until new 2010–11 Departmental Expenditure Limits are published in the Treasury’s next annual public spending statistics).

"The largest unprotected area would be schools. The impact of the spending cuts on people at different points of the income distribution would depend on where the axe falls. So we cannot say how the pattern of losses would compare to the patterns of gains from the NI cut.

"By cutting spending next year and delivering the tax cut a year later the Conservative proposal would take additional spending power out of the economy for a year at a time at which the recovery is likely to be at its most fragile. Combined with Labour’s existing plans, it would increase the discretionary fiscal tightening between this year and next to £29 billion or more than 2% of national income – significantly larger than that planned for subsequent years, even though the recovery should by then be stronger.

"The Conservatives claim that the spending cuts can, in effect, be rendered painless by efficiency savings that they say their advisers have identified. Whether or not that is true, using the bulk of these spending cuts to finance the NI cut means that they are not available to contribute to the task of reducing government borrowing that the Conservatives have set such store by. Reducing the deficit more quickly than the Government plans to will therefore require even greater cuts to public services spending, or to greater reliance on welfare cuts or tax increases that might be as economically costly as the NI increases they are seeking to mitigate."

Meanwhile, what Vince Cable describes as those "clowns" of the rating agencies are at it again. S & P has chosen the day of the chancellors' TV debate to reaffirm its negative outlook on UK sovereign debt. Confirmation, if it were needed, that they are using this as a marketing tool.

The bad January weather complicated things enough without the Office for National Statistics' recent switch to a new definition of retail sales. So retail sales volume including petrol sales apparently plunged by 3% in January, before rebounding by 2.1% in February. A more reliable picture is provided by the old measure, excluding these volatile petrol sales. That showed a drop of 2.1% in January followed by a rise of 1.6% in February. Sales in February were in line with their fourth quarter average. More here.

A first response to the budget.

This may have been the first authentic Alistair Darling budget and, depending what happens over the next few weeks, perhaps the last. It wasn’t flash, and it clearly wasn’t Gordon’s.

What did he seek to do? Three things. To demonstrate that the government, as he kept saying, made “the right calls” during the crisis and recession and are still doing so. So the contrast between unemployment in this recession and those of the 1980s and 1990s was a recurring theme. So was the fact that, had things been done differently, and spending cuts introduced earlier, public borrowing would have been higher, not lower.

His second theme was one of “enabling” government. Ronald Reagan is supposed to have said that the most terrifying words in the English language were: “I’m from the government and I’m here to help.” Darling, as he set out in his Callaghan lecture a few months ago, does not believe this. Government helped in the recession and will help, with pump-priming and other measures, during the recovery.

So the chancellor, in his best Edinburgh lawyer style, gave us an array of, low-key, low-cost (and in some cases no cost) micro measures. Seldom has so much of a budget speech been given over to announcements that, in Treasury terms, amount to no more than small change.

Small businesses, however, liked quite a lot of it, including cuts in business rates, more generous investment allowances and an increase in the ceiling for entrepreneurs’ relief. That was quite astute. Most people in Britain work for small firms. Any swing in the small business vote back to Labour from his £2.5 billion “growth package”, represents more bang for the buck than more obvious pre-election sweeteners would have done. The other clear message, given the long lead time for some of these measures, is that a Labour government intends to be around to implement them.

The mammoth in the room is, of course, his third theme, the budget deficit. To unveil a £167 billion deficit as a minor political triumph just shows how dreadful Britain’s public finances had become. At least he resisted pressure to use that £11 billion for extra public spending, which would have been a grave error.

An undershoot is better than an overshoot. The Treasury has won a minor battle with independent forecasters, many of whom even a few weeks ago were predicting a borrowing overshoot. The consensus has also come round to the Treasury view on growth in 2010; 1% to 1.5%.

It is over later years that the debate is still raging. The recovery, in Darling’s view, is a delicate little flower that has to be carefully nurtured. Then, when it starts flowering, there is no stopping it. So, 3% to 3.5% growth in 2011 (fractionally down on his earlier optimism) and 3.25% to 3.75% in 2012. Past recoveries have been strong but rarely have they been more essential to achieve the chancellor’s ambitious goals for repairing the public finances; more than halving the deficit over four years..

Can it happen? Yes. Will it happen? A genuinely cautious chancellor would have slotted in growth forecasts for 2.5% a year from 2010 onwards and taken the benefit it things turned out better, rather than bet the ranch on such an optimistic prospect. Perhaps, however, he just thinks that will be somebody else’s problem.

The February inflation figures are a bit of a game-changer. Had consumer price inflation stayed close to January's 3.5%, or even risen, the markets would have concluded that the Bank had got it wrong and that the pass-through from sterling's weakness was bigger and would be more sustained, swamping the inflation-dampening effects of spare capacity.

As it is the drop in consumer price inflation from 3.5% to 3% was better than expected. RPI inflation stayed at 3.7%, boosted by the housing effect, but RPIX inflation, the old target, dropped from 4.6% to 4.2% (much more above its old 2.5% target than CPI is above 2%). Interestingly, CPIY, excluding indirect tax changes, was much lower in February than in the autumn, and its annual rate is just 1.4%. That may be a better measure of "core" CPI inflation than the measure excluding energy, food, drink and tobacco, which edged down from 3.1% to 2.9%. More here.

The British Bankers' Association said mortgage approvals remained subdued, edging up from 35,154 in January to 35,276 in February.

Mervyn King has given a lecture to the Royal Society, based on this paper. The theme is about the inherent uncertainties involved in economic policymaking and in economic forecasting. It is sometimes said that economic forecasters were put on earth to make weather forecasters look good. The paper suggests that the parallels are closer than that. The Bank has got together with the Met Office to compare notes and both are suitably humble about their ability to foretell the future.

Some commentators will pick up on this, from the Bank's news release: "He [King] notes that it is possible to identify potential system vulnerabilities and determine the factors that contribute to potential instability. For example, many people, including at the Bank of England, did identify the vulnerabilities of the financial system before the crisis without being able to predict when or how the crisis would begin. He therefore says: “The key is for policymakers to focus on making the structure of the underlying system more robust to shocks. For example, in avalanche areas the snow may be ‘seeded’ so that, by inducing small avalanches, the chance of a large avalanche is mitigated. In the context of the financial system, policymakers could impose a ‘Glass-Steagall’ style separation between the payments system network and risky activities”.

My new book is out, and available on Amazon for a big discount, and elsewhere. This is a taster from the Introduction to whet your appetite:

Most economic and financial crises follow a set pattern. Either governments and central banks deliberately engineer slowdowns which spill over into recession or there is a big initial economic ‘shock’, such as a sudden rise in oil prices, followed by a series of smaller aftershocks. This was different.

The shocks kept coming and increased rather than decreased in intensity. The initial events, the crisis for some US mortgage lenders, the problems at two Bear Stearns’ hedge funds followed by difficulties at some European banks and then the run on Northern Rock, almost paled into significance in comparison with what followed. Most crises, too, have a finite sense about them. Even in the darkest days you know the mechanisms exist for getting out. In the 2007-9 crisis, in contrast, the slough of despond seemed never-ending.

There were times when, as we shall see, even professionals thought their money was safest under the mattress. In the autumn of 2008, when as we now know the banking system came perilously close to shutting down, the most frequent question I was asked was where people should put their money. There was a straight answer to this which was that for those who had it, they should divide their savings among different banks, staying within the £50,000 compensation limit at each. Similar considerations applied in other countries. The truth was, however, that if the banking system went down there would be no compensation. There would be no economy.

How did we get to such a situation? Can we ever rely on our banks again? Most people have a pretty good general idea about the crisis of 2007-9, a series of economic and financial events that changed the world. The near-collapse of the global banking system was not supposed to happen. In an era of financial globalisation and sophisticated modelling of risk, the manias, panics and crashes of the past had apparently become historical curiosities.

Financial derivatives were based on the idea that parcelling up loans and selling them to a wide range of investors across the globe would spread risk – Alan Greenspan said so. Instead these instruments amplified such risk and produced the biggest collapse of financial confidence in the modern era. It also ushered in a new and more uncertain era which would last beyond the immediate crisis.

And just as there was nothing new in the nature of the panic – except for its scale and global reach – so there was little new in these kinds of shifts in the economic environment. We get comfortable, then we get complacent, then we panic, then we take years to get over it – as was said during the Asian crisis of 1997-8: ‘Confidence grows at the rate a coconut tree grows, but it falls at the rate a coconut falls’.

Thus, the golden age of the 1950s and 1960s was followed by the turbulence of the 1970s and 1980s, a period of high inflation and mass unemployment. This appeared to be the new norm. But the 1990s ushered in a new golden age of stability, in which inflation was low, unemployment fell and the world economy enjoyed its best run for decades. The new golden age lasted until the summer of 2007, surviving smaller crises, terrorist attacks and political upheaval, when it crumbled abruptly. The new instability meant the world could face years of adjustment to the biggest financial shock since the Great Depression.

The aim of this book will be to set the events of 2007-9 into wider context, partly picking up from where an earlier book of mine, From Boom to Bust, left off in the early 1990s, For Britain, that coconut tree of confidence grew over many years – a 16-year period in which the UK did not experience a single quarter of falling gross domestic product – giving rise to Britain’s own version of hubris.

The long timespan is appropriate; the development of the so-called shadow banking system began in the early 1980s, while the era-defining events of 1989 also set in train new economic forces. I have looked at those events, together with the Asian, Russian and hedge fund crises of 1997-98, and the extent to which they were a dress rehearsal for the much bigger crisis a decade later. There is the story of Britain leading up to the crisis and that famous, now embarrassing, phrase beloved of Tony Blair and Gordon Brown, ‘no return to boom and bust’. How could they have been so bold, or so foolish?

No account would be complete without examining the housing boom, both in Britain but also America’s subprime boom. In telling the story of the crisis itself, I have tried to steer a course between detailing every takeaway pizza and expletive as bankers negotiated to save their skins with governments, central bankers and regulators, and not getting too bogged down in it. Important moments may have been inadvertently missed out but there is also a risk of not seeing the wood for the trees. Each one of those crisis weekends probably merited a book itself. There was high drama and there was plenty of it. The book also examines where the crisis leaves the subject of economics and where it leaves the world.

Danny Blanchflower, ex of the monetary policy committee, has had most of his former colleagues in his sights since leaving the MPC, but perhaps none more so than Andrew Sentance. Sentance, however, is undeterred. While Blanchflower was and is gloomy, Sentance is upbeat. In particular, he thinks the "very encouraging" bounce in the global economy is benefiting the UK economy and will do so further. He also talks of the need to withdraw the economic stimulus, though his emphasis is on fiscal rather than monetary policy. The speech is here. It was at odds with comments by Sentance on Friday morning, in which he acknowledged the risks of a "double-dip", which hit sterling. I'd say acknowledging the risk doesn't mean he expects it to happen.

When the public borrowing forecast is £178 billion, an undershoot of a few billion is no reason to pop the champagne corks, but think of the alternative. Public sector net borrowing of £12.4 billion in February was below expectations and the January figure waas revised down to virtually zero. Even public sector net debt, at 60.3% of GDP, is below its recent peak. More here.

Also today, the CBI reported an improvement in export orders, though the Bank of England said bank lending remained constrained, particularly to business. More here.

Some will focus on the fact that employment in the three months to January dropped by 54,000 to 28.86 million, and that at 72.2%, the employment rate was the lowest since November 1996. But the broad picture was much better, particularly for unemployment.

The claimant count dropped by 32,300 to 1.59 million, 4.9% of the workforce, its biggest monthly fall since November 1997, and the January rise, which spawned a thousand double-dip headlines, was revised down to just over 5,000. This points to a better employment picture for the three months to February.

As for the Labour Force Survey measure of unemployment, this is what the Office for National Statistics had to say: "The unemployment rate fell by 0.1% on the quarter to reach 7.8% for the three months to January 2010. This was the first quarterly fall in the unemployment rate since the three months to May 2008. The number of unemployed people fell by 33,000 over the quarter to reach 2.45 million. There has not been a larger quarterly fall in the number of unemployed people since the three months to July 2007." More details here of what were, on balance, a very good set of numbers.

Meanwhile, the Bank of England's monetary policy committee, in its March minutes, echoed Charlie Bean's view on Tuesday evening that growth was likely to have continued in the first quarter. Otherwise, fairly neutral, though with just a hint that inflation is more of a concern than it was. The minutes are here.

As somebody who handles polling for The Sunday Times, I am happy to declare an interest, but surely we can expect better than the familiar argument from Dominic Lawson in The Independent that polls should be banned during election campaigns. That, Dominic, is when they are most interesting.

The Lawson article is here. Anthony Wells's excellent response on UK Polling Report, which I think is game, set and match for the pollsters, is here.

Quite what the European Commission, home of profligate finances and dodgy accounts, was doing calling for more drastic action to cut Britain's budget deficit is not clear. The story of its draft report, leaked to Reuters, is here. It would indeed be nice if all EU member countries could get their budget deficits down below 3% of GDP as quickly as possible.

But the Commission's call, which has no sanctions behind it, is an exercise in pointlessness. Perhaps Brussels is getting revenge for all that lecturing by Gordon Brown when he was chancellor. As it is, one of the themes of Alistair Darling's budget on March 24 will be that Britain is being held back by weak EU growth. The Commission should concentrate its fire closer to home and try to do something about that.

The new book will be published on Thursday March the 18th. Watch this space for more details. It can be pre-ordered on Amazon.

A year ago, the Bank of England embarked on quantitative easing. By last month, when it paused, £200 billion of asset purchases, mainly gilts, had been completed. Did it work? Perhaps, in the absence of a counterfactual, we will never know. Spencer Dale, the Bank's chief economist, is however keen to bang the drum, as he did again in a speech today.

"One year on, there is a range of evidence – some relatively hard, some more circumstantial – that quantitative easing is having its desired effect," he said. "Asset prices have increased substantially, companies have made record recourse to debt and equity markets, confidence has recovered and inflation expectations remain firmly anchored. But there is still a long way to go. The bulk of our asset purchases have been made only over the last 9 months or so. Much of their effect on nominal spending and inflation is still to come through. We are likely to learn a lot about the transmission of those purchases and about their ultimate impact over the course of the next year."

The speech is here.

After reported falls in house prices in February from both the Nationwide and Halifax, the latest news from Acadametrics, which used to produce the FT's house price index, gave a rather different picture. It showed that prices rose by a hefty 1.9% in February, for an increase of 9.7% on a year earlier. The average house price in England and Wales was £222,008. I like the Acadametrics house price index for its completeness and rigour, but why the big difference? Dr Peter Williams, Acadametrics chairman, explains:

"Given that the two lender mortgage approval based indices for February showed falls of -1.0% and -1.5%, we have a clear tension as to what is really happening in the market. The AcadHPI for the latest month is forecast on a mix of data but, as prior months show, when more data becomes available is impressively stable and reliable. In seeking answers to the current divergence we would stress AcadHPI is a completion based measure, it covers England and Wales rather than the UK and it includes all properties sold including cash purchases and homes sold for over £1 million. All of these will be factors in explaining the difference."

The index is here.

January's manufacturing numbers, showing a drop of 0.9%, add to the evidence that the UK economy doesn't handle bad weather too well. Overall industrial production fell by 0.4%. Despite this, the National Institute reckons growth is hanging in for a positive first quarter number. It reckons that GDP in the three months to February showed a rise of 0.3% compared with the previous three months. Still, a decent manufacturing bounceback in February would be useful. The latest figures are here.

A widening of the trade deficit in goods and services to a 17-month high of £3.8 billion in January and a sudden drop in exports looks alarming. More likely, it is just a bit odd. These numbers are subject to almost immediate revision - the December deficit was revised down from £3.3 billion, even leaving aside weather effects. They sit uneasily alongside surveys showing a strong rebound in export orders and deliveries.

The details are here but, while they will make big news in tomorrow's papers, and have weakened the pound a bit, should be taken with a pinch of salt.

The British Retail Consortium's retail sales monitor looks healthy enough, with like-for-like sales up 2.2% on February 2009, and total sales up 4.5%. The BRC says, however, that February 2009 was exceptionally weak and that the weather continued to have an impact on the numbers. So non-food sales benefited from a bounce-back after January's disruption, while food sales may have suffered because people apparently stocked up for a long winter. More details here.

The news on "pipeline" inflationary pressures has improved a little, with input price inflation dropping from 7.7% in January to 6.9% in February and output price rising by a modest 0.3% on the month. Sterling's latest fall will put some upward pressure on input prices, though for the moment the pound is holding in at just above $1.50 and between 1.10 and 1.11 against the euro. More on the producer prices here.

"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 maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion."

New car registrations continued to climb, though at a slower rate, and the test will be when the scrappage scheme comes to an end soon. Registrations in February, 68,586, showed a 26.4% rise on a year earlier.

The Halifax's report of a chunky 1.5% fall in house prices in February, meanwhile, confirmed the Nationwide's report of price weakness a few days ago. Is it the weather, or the beginning of a new downward trend? We won't know for a couple of months. More details here.

Further evidence against a first-quarter double-dip has been provided by the service-sector purchasing managers' index, which greatly exceeded expectations by rising from 54.5 to 58.4. Taken together with the other PMIs, the surveys are consistent with output expanding at a good pace.

This is the verdict of Markit, which produces the data: "The ‘all-sector’ PMI Output Index, which combines business output and activity measures from the services, manufacturing and construction CIPS/Markit surveys, rose from 54.9 in January to 57.7 in February; its highest reading since August 2007. The improvement in the index more than made up for the
weather-related slowdown seen in January.

"Thus, despite the hit to trade at many business dealt by January’s snow, at 56.3 the average reading for the all-sector Output Index for January and February is above the average of 55.8 seen in Q4. This puts the survey data for Q1 at a level consistent with GDP rising by approximately 0.5% compared to the revised figure of 0.3% recorded in Q4."

The output side of the economy is not yet pointing to a double-dip in the first quarter. The purchasing managers' index for manufacturing remained at 56.6 in February, holding at its highest since the early 1990s and suggesting industry is growing at a decent pace.

Mortgage approvals from the Bank of England, at 48,198 in January, were sharply down from the December figure of 58,223, as expected, though net mortgage lending, at £1.5 billion, was above the December figure of £1.2 billion. More here. The debate is over whether the drop in approvals is a weather-related blip. RICS (the Royal Institution of Chartered Surveyors) expects approvals to resume their climb, hitting 70,000 before the year is out.

I've only just got round to reading George Osborne's Mais lecture of a couple of days ago and it is rather good, one of the clearest expositions of the economic challenges facing Britain you'll come across.

It includes: "First, a new approach to macroeconomic and financial policy, where we seek to contain credit cycles as well as target price stability.

"Second, a new fiscal policy framework, with an independent Office for Budget Responsibility to ensure that public debt is sustainable.

"And third, a supply side revolution that releases the pent up enterprise and wealth creation of our country, encourages a nation of savers, and addresses the long term structural weaknesses that no government has ever properly tackled - like poor education and a welfare system that traps people in workless poverty." The lecture is worth a read, here.

After Thursday's weak business investment figures, there was a certain amount of trepidation about the revised fourth quarter GDP figures, most of it misplaced. In the event the Office for National Statistics came through with an upward revision from 0.1% to 0.3%, in line with expectations ahead of the initial release in January. The initial release was too gloomy on both services and manufacturing. The former was glaringly clear at the time.

The ONS also revised earlier data lower, however, so the peak-to-trough decline in GDP is now put at 6.2%, from 6%, making it a record decline on current data. The fourth quarter of 2008 and the first quarter of 2009, when GDP fell by a combined 4.4%, were grim indeed. Some of these figures will be revised and look too weak, particularly the third quarter of 2009 when compared with other evidence. But they won't remove the sense of an economy that was falling off a cliff. More here.

Meanwhile, figures from the Nationwide building society, which showed a 1% house-price fall for February, contrasted with Land Registry data which showed a 2.1% January rise. The Nationwide's numbers are at the start of the buying chain so, while probably weather-affected, are more timely. It is too soon, however, to say they mark the start of a new downward trend. Land Registry here and Nationwide here.

On a day when several members of the Bank of England's monetary policy committee (MPC) have spoken in evidence to the Commons Treasury committee - and have been mostly downbeat - Paul Tucker, the deputy governor, has also given a speech.

It is an interesting one. Monetary policy did not actually create asset price bubbles but, as he put it: "The suggestion that I have heard most frequently from thoughtful market participants is not that monetary policy was directly responsible for the bubble, but that it contributed to an appreciation of asset prices which then got out of hand."

He also points out that warnings in the past from the Bank and others about the threat to financial stability could be safely ignored by participants because there were no tools to back them up. That should change in the future.

On spare capacity, where he uses the term "effective supply", he said this: "Supply conditions are going to depend heavily on the path of aggregate demand. If demand recovers robustly, firms are likely to bring some capacity back on line. If, on the other hand, demand proves anaemic, then suspended-capacity is more likely to be permanently scrapped. Under the first scenario, inflationary pressures could be weaker than would otherwise be the case in a recovering economy. Under the latter scenario, inflationary pressures would be greater than otherwise in a stalled economy. I do not want to go so far as saying that the path of aggregate demand won’t affect inflation, but it may not be quite as potent as usual."

It is clear which path is more desirable. The speech is here.

Last weekend's letter to The Sunday Times by 20 leading economists appears to have had the effect of waking up every economist in the land, and beyond. In response to the letter organised by Professor Tim Besley calling for a more credible deficit reduction plan, beginning in 2010-11, two letters appear in the Financial Times today, led by Lord Skidelsky and Lord Layard, saying in effect that to start cutting too soon would be disastrous.

This week's data have pointed both ways. The public finances were in a worse state in January than expected, while retail sales slumped by 1.2% last month (1.8% including petrol sales), giving succour to the double-dippers. The sales figures, of course, were hugely affected by the January snows so should be taken with a pinch of salt. As Mervyn King once said, the true meaning of Christmas is often not clear until Easter.

As for the letters, an ancient, quasi-religious war has exploded into the open, buried for years and brought back into life by the crisis. I don't know how familiar the letter-signers are with the details of Britain's public finances and the government's plans. I suspect not very much, or else they would know that this is a phoney war.

Let us be clear: the government's plans are for a fiscal tightening beginning in 2010-11, including the start of a sharp fall in capital spending and tax increases. The Tories, at the margin, would go a little further in 2010-11 if they could, but not hugely.

The Layard letter does at least acknowledge that 1% spending cuts are planned for 2010-11, though tax increases apparently don't matter, and is the more serious contribution. As for the Skidelsky letter, I doubt his beloved Lord Keynes would have signed up to it.

Why is the government's plan to halve the deficit not credible? Mainly because for all Alistair Darling's sincerity, every time Gordon Brown opens his mouth he gives the impression that he will backslide on the plan - even now the talk is of spending the proceeds of lower than expected unemployment - if he possibly can. The Treasury needs to find a way of shutting him up.

January's public finance numbers were clearly disappointing, with the first net borrowing in a January -£4.3 billion -since the early 1990s, against expectations of a £2.6 billion surplus. Receipts, particularly income tax receipts, were very weak. The IFS, for one, has not given up hopes of an undershoot, however. Its analysis is here.

Expect lots of "double-dip" headlines following the 23,500 rise in claimant count unemployment to 1.64 million in January but don't take them too seriously. It was always going to be a miracle to get through January and February without further rises in the claimant count, and the increases this time are a fraction of those a year ago. The weather won't have helped. The wider measure of unemployment, based on the Labour Force Survey, slipped by 3,000 to 2.46 million over the October-December period and the rate remained at 7.8%. The fall in full-time employment, 37,000, was the smallest since the three months to July 2008. There's plenty of slack in the labour market but these figures remain very good. More here.

The Bank of England, meanwhile, had a big debate about quantitative easing (QE) but managed to coalesce around a 9-0 vote in favour of not doing any more for the moment. There were arguments on both sides. Clearly some MPC members are concerned about the headwinds facing the economy while others think the effects of QE on asset prices and the upside risks to inflation were good enough reasons to stop. "Taken together, all members felt that the arguments in favour of leaving the size of the asset purchase programme unchanged at this meeting were more persuasive," the minutes said. "But for some members, the arguments were very finely balanced." More here.

Some expected a 4%-plus figure but, as it was, inflation was exactly in line with expectations at 3.5%, nevertheless requiring a letter of explanation from Mervyn King to Alistair Darling. The consumer prices index actually fell between December and January, despite the return of VAT to 17.5%. Normally, however, it falls much more, hence the jump in consumer price inflation from 2.9% to 3.5% and the even bigger jump in retail price inflation from 2.4% to 3.7%. More details here.

RPIX inflation, the old target, rose to 4.6%, up from 3.8%, well above its old 2.5% target. For all these measures, the Bank is confident that inflation will fall back sharply as the year progresses. At least that hope did not falter at the first hurdle with a bigger-than-feared CPI jump in January.

Looked at from a British perspective, the only good news about the fourth quarter Eurostat growth figures was that UK growth, 0.1%, was bang in line with both the EU and eurozone averages. Otherwise it was a downbeat picture. Spain (down 0.1%) has yet to pull out of recession; Greece (down 0.8%) is in an even worse position; Portugal (zero after 0.6% in the third quarter) has weakened; Italy has slipped back (down 0.2% after 0.6% in the third quarter); and, of course, Germany (zero after 0.7% ion the third and 0.4% in the second). Let's salute France, up 0.6% in the fourth quarter; its recovery has lasted for three quarters and is still going strong. More here.

A belated comment on the Bank of England's inflation report. The growth forecast is slightly less perky than three months ago, though this is balanced by a more confident tone. The Bank thinks that the downside risks to the recovery have diminished. It also thinks that inflation will fall very sharply after its current blip, implying no need for quite some time for the monetary policy committee to think about raising interest rates or reversing quantitative easing. If things turn out like this, it would be rather good news. The inflation report is here.

Meanwhile, official figures showed a decent rise in manufacturing output in December, up 0.9%. The National Institute of Economic and Social Research suggests on the basis of this that gross domestic product rose by 0.4% in the three months to January. That's the kind of momentum the economy needs. More here on industrial production.

The only good thing to be said for the December trade figures is that they were consistent with a healthy pick-up in demand, together with the effects of the scrappage scheme and some "lumpy" aircraft imports. The overall trade deficit, £3.3 billion, was the widest since October, while the quarterly trade deficit in goods was the biggest since the fourth quarter of last year. No sign of an export-led recovery yet. More here.

Downbeat data from the British Retail Consortium, with total sales in January up just 1.2%, and on activity (thought not prices) from the Royal Institution of Chartered Surveyors (RICS) mainly reflect the snows.

You might have expected the US and UK labour markets to behave similarly in this recession. After all, we are supposed to have similarly "Anglo Saxon" flexible labour markets. The contrast, however, is striking. New figures on Friday revealed a welcome drop in the US unemployment rate from 10% to 9.7% but they also revised up the number of jobs lost in America to 8.4 million, 6% of the workforce.

In contrast, UK employment has dropped by only 642,000, a fraction over 2% of the workforce, despite a bigger officially-recorded drop in UK gross domestic product,

The striking thing from this morning's insolvency statistics was that company failures in England and Wales in the fourth quarter, 4,566, were down by 1.7% on the third quarter and by 1.1% on a year earlier. Normally company liquidations lag the cycle, so there could still be worse to come.

Individual insolvencies continued to rise, hitting a record 35,374 in the fourth quarter, up by 24.9% on a year earlier but a modest 0.9% compared with the third quarter. More here.

Producer price inflation in January rose to 3.8%, or 2.5% on a core basis, for output prices, and went up from 7.4% to 8.4% on input prices.

The markets were right to call the end of quantitative easing at the Bank of England's February meeting and interest will now focus on next week's inflation report and the minutes of the monetary policy committee's meeting. In its statement, the Bank says it could return to the policy at some stage if conditions warrant it, but also emphasises that the £200 billion of asset purchases so far will continue to provide a stimulus; the stock matters as well as the flow.

This is the Bank'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 maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion.

"After a substantial fall in output, the United Kingdom economy recorded sluggish growth in the final quarter of 2009. Spending by households appears to have picked up a little, though that may partly reflect temporary factors. The rate of decline in businesses’ investment spending appears to have eased. And the world economy continued to recover, raising the demand for UK exports.

"CPI inflation has risen sharply to well above the 2% target, reaching 2.9% in December. That rise was largely accounted for by higher petrol price inflation and the reduction in the main VAT rate a year earlier dropping out of the calculation. Inflation is likely to have risen further in January, reflecting the restoration of the VAT rate to 17.5%. Pay growth has remained subdued.

"The considerable stimulus from the easing in monetary policy, the lower level of sterling and the recovery in UK export markets should together support domestic activity. But credit conditions are likely to remain restrictive, while the need to strengthen public and private sector finances will also weigh on spending. On balance, the Committee believes that the prospect is for a gradual recovery in the level of activity. The recession has probably impaired the supply capacity of the economy, but the scale and persistence of the fall in output means that a substantial margin of under-utilised resources is likely to remain for some time to come. That is likely to mean that inflation will fall below the target for a period.

"In the light of the Committee’s latest Inflation Report projections and in order to keep inflation on track to meet the 2% inflation target over the medium term, the Committee judged that it was appropriate to maintain Bank Rate at 0.5% and its stock of purchases of government and corporate debt financed by the issuance of central bank reserves at £200 billion. The Committee noted that this stock of past purchases, together with the low level of Bank Rate, would continue to impart a substantial monetary stimulus to the economy for some time to come. The Committee will continue to monitor the appropriate scale of the asset purchase programme and further purchases would be made should the outlook warrant them."

The scrappage scheme has been extended a month and the motor industry will mourn its passing. New car registrations in January were 29.8% up on a year earlier and 17.8% of sales were under the scrappage scheme. Even so, the SMMT expects sales for the full year to be down 9% to 1.82 million. More here.

Meanwhile, the Halifax said house prices rose by 0.6% in January and on a three-monthly basis were 3.6% up on a year earlier and on a raw basis 9.9% higher than their April low. The monthly rise was the smallest for several months but was in line with the long-run average. More here.

Swings and roundabouts. After a better than expected purchasing managers' index for manufacturing, ther service sector PMI slipped from 56.8 to a five-month low of 54.5. That is still above 50, so expanding, though at a slightly slower rate. But the blame is put squarely on the poor weather at the beginning of the month, so perhaps not too much to fret about.

The REC/KPMG report on jobs, also produced by Markit, was more upbeat. It said demand for staff grew at its fastest rate since July 2007.

A good start to the year for UK manufacturing, with the Markit-CIPS purchasing managers' index at a 15-year high, lifted by strong exports. The index rose to 56.7 from an upward-revised 54.6 in December. Export orders were the strongest recorded. Good news. More here.

Bank of England data for December were less convincing, with mortgage approvals slipping from 60,045 to 59,023 and consumer credit up by £0.1 billion. Maybe we're seeing some rebalancing. M4 lending excluding intermediate OFCs (other financial corporations) rose by £9.1 billion in December, compared with a £15.6 billion rise in November. More on the Bank's website, www.bankofengland.co.uk.

A strong start to 2010 for house prices, according to the Nationwide Building Society, with prices starting the year with a rise of more than 1%. This is what Nationwide said:

"House prices strengthened their upward momentum at the start of 2010, increasing by a seasonally adjusted 1.2% month-on-month in January. The 3 month on 3 month rate of change – usually a smoother indicator of the near term trend – dipped slightly from 2.3% in December to 2.1% in January, but this primarily reflects the smaller price increases recorded in November and December. At £163,481, the average price of a typical UK property cost 8.6% more than a year earlier in January, up from 5.9% in December. Unless there is a fall in property values in February, annual house price inflation is likely to move into double-digit territory next month for the first time since May 2007."

Consumer confidence also picked up, with the GFK-NOP measure up by two points in January. More here.

An interesting speech, here, from Andrew Sentance, a member of the Bank of England's monetary policy committee. He thinks the private sector in the UK is resilient enough to be able to grow through a period of public sector cutbacks, and likens the current period to the recovery from the recession of the early 1990s, when it took time for growth to get properly growing.

The housing market, on the other hand, is more likely to be like that of the early 1980s, when there was no supply overhang and demand and activity recovered as the economy pulled out of recession. As for interest rates, the sense from the speech is that nothing will be happening for a while but then it will be the balance between the impact of fiscal tightening and the upward pull on inflation from economic expansion that determines where rates are heading.

All the usual caveats about the first estimates from the Office for National Statistics apply, and the picture we have now is not one we will have in a couple of years time. Even so, a 0.1% rise in gross domestic product in the final quarter of 2009 was the smallest possible and shows a recovery that was more fragile than most (not all) expected. Everything except agriculture rose modestly, and that was it. More here.

Essentially these numbers show that the economy - even on the official figures - has been flat since mid-2009, a 0.2% fall in Q3 GDP followed by a 0.1% rise in the fourth quarter. They make a technical "double-dip" more likely, though a flattish first quarter is more probable.

2009, with a GDP drop of 4.8%, was the worst since post-war records began. We will not know until the revisions come through how the recession as a whole ranks in the pantheon of post-war recessions. In terms of longest, the first quarterly fall in the mid-1970s recession was in Q3 1973 and the last fall was in Q2 1976, though there were rises and falls in between. The same applied to the recession of the early 1990s. The first quarterly fall was Q3 1990 and the last fall was Q2 1992, but there were a couple of rises during that period.

With a 6% peak-to-trough decline in GDP, the recession is exactly on a par (on current figures) with that of 1979-81.

There's more than a hint in the latest data for the public finances that things are getting worse at a slower pace than feared, December's net borrowing of £15.7 billion was more than £3 billion below market expectations and only £2 billion worse than in December 2008. Cumulative borrowing so far in this fiscal year, £119.9 billion, compared with £63.6 billion in the corresponding period of 2008-9. A straight read-across would suggest a full-year outturn of between £160 and £170 billion, compared with the Treasury's £178 billion forecast. More here.

The Bank of England revealed a modest improvement in credit availability in its trends in lending report, here, but a disappointing 0.4% drop in M4 adjusted for securitisations in December. It suggested, however, that its own adjusted M4 series, to be published in early February, might be a little stronger.

The labour market news continues toi be better than expected. While employment in the September-November period slipped by 14,000 to 28.92 million - a 113,000 drop in full-time employment being offset by a 99,000 rise in part-timers - unemployment on the LFS measure fell by 7,000 to 2.46 million, the first drop since May 2008, while the unemployment rate remained unchanged at 7.8%.

The claimant count also fell, for a second successive month, dropping by 15,200 to 1.61 million, the largest monthly drop since April 2007. While the labour market is far from strong, and average regular pay is rising by just 1.1% annually, the labour market outcome continues to be far better than feared. More here.

The Bank of England's monetary policy committee meeting earlier this month came well before these numbers. The minutes, just released, are available here and remained downbeat.

"Overall, the data were consistent with the view that the UK economy had begun to expand again, albeit weakly," they said. "But the strength and durability of any recovery would depend on the interplay of the significant tailwinds and headwinds affecting activity. The main supports to activity remained the significant degree of policy stimulus and the past depreciation of sterling. It was unclear how much net trade had yet responded to that depreciation, but the Committee agreed that some boost would eventually occur.

"There remained powerful headwinds impeding the recovery. The supply of bank credit was likely to remain impaired for a sustained period as banks sought to adjust their balance sheets and refinance their own funding maturing over the coming years. Uncertainty about prospective incomes was likely to prompt more cautious behaviour by households, encouraging greater saving than in the past, and investment was unlikely to recover strongly so long as a significant margin of spare capacity existed in the economy. In addition, it was clear that a significant fiscal consolidation was needed in the United Kingdom, the precise nature and pace of which remained unclear, and to which monetary policy would need to respond as new information became available."

In a speech in Exeter, Mervyn King likened the problem of global imbalances to "Sudoku for economists", a new take on the familiar problem of how to get surplus countries, as well as deficit ones, to adjust their behaviour. "At present there is no political mechanism for achieving that consistency," he said. "Finding such a mechanism is urgent. Having narrowed somewhat at the height of the crisis, the imbalances are now widening again."

He also addressed the sharp jump in inflation in December, from 1.9% to 2.9% and was cautious about how long it might take to get back to target. "The rise in VAT back to 17.5% means that CPI inflation is likely to rise to over 3% for a while, or even higher for even longer were energy prices or indirect taxes to increase further," he said.

"Although such price level effects do not constitute a continuing source of inflation, and hence should be temporary, they remain in the official measure of inflation for a full year. Provided monetary growth remains well under control – and remember that at present it is undesirably low – inflation should return to target in the medium term."

The speech is on the Bank website.

Inflation turned out to be worse than expected, with consumer price inflation up from 1.9% to 2.9%, a record monthly increase, RPI inflation up from 0.3% to 2.4%, its biggest monthly rise since 1979, and RPIX inflation up from 2.7% to 3.8%, a level that in the old days would have forced an open letter from the Bank Governor.

The Office for National Statistics emphasises that this inflation jump is entirely a product of what happened a year ago, when price pressures were firmly downwards. It says: "This record increase is due to a number of exceptional events that took place in December 2008: the reduction in the standard rate of Value Added Tax (VAT) to 15 per cent from 17.5 per cent; sharp falls in the price of oil; pre-Christmas sales as a result of the economic downturn.

"These exceptional events led to the CPI falling by 0.4 per cent between November and December 2008 (a record fall between these two months). The CPI increase between November and December 2009 of 0.6 per cent is far more typical (the CPI increased by 0.6 per cent between November and December in both 2006 and 2007). These exceptional events also affected the change in the RPI annual rate."

Even so, the figures show significantly higher inflation than the Bank was expecting and pose a presentational challenge. They make an open letter next month all but inevitable, are hard to square with any further quantitative easing and will ignite the debate about when the Bank will start to raise rates. I still think that's some way off but sterling has climbed again. More details here.

The November industrial production figures were disappointing, showing manufacturing output flat and overall production up by a modest 0.4% between October and November. More here. But that has not stopped the National Institute of Economic and Social Research predicting fourth quarter GDP growth of 0.3%.

Its analysis is here. I hope people avoid the temptation to go for NIESR's "biggest contraction since 1921" line. One thing we know is that in a couple if years of revisions it won't be.

Britain's trade deficit in goods and services narrowed to £2.9 billion in November, from £3.1 billion in October. Export volumes edged up by 0.2% in November while imports dipped by 0.9%. A clear trend is, however, still hard to detect. More details here.

Meanwhile, the Department of Communities and Local Government reported its first 12-month increase in house prices, 0.6%, since mid-2008. November was strong, with prices up by 1.7%, after 0.5% in October.

Producer price inflation hit 3.5% in December, its highest for 11 months, largely on the back of higher fuel prices. "Core" output price inflation was a more modest 2.6%. Input price inflation also rose, from 4% to 6.9%. More here.

The FT house price index, produced by Acadametrics, had its last outing under its current sponsors. It record a 0.8% December price rise, the eighth in a row, for an increase of 4.2% on a year earlier.

No change, and not much to say. Bank rate stays at 0.5% the monetary policy committee agrees to stick with the £200 billion quantitative easing programme which will take another month to complete. Mind you, February will be interesting.

The Halifax reported that house prices rose by 1% in December, to an average of £169,042. Though the Halifax reports this as a modest 1.1% gain over 12 months, this is because of the way it smoothes its data. On a straight 12-month basis, comparing December 2009 with December 2008, the rise was 5.6%.

New car registrations were also strong in December, with 150,936 new cars sold, a rise of nearly 39% on a year earlier. 2009 was still a bad year for the market, with the 1,994,999 new cars registered representing a drop of 6.4% on 2008 and the worst year since 1995. But it would have been much worse without the highly successful scrappage scheme.

The contrast between the purchasing managers' index for the services sector and the official figures is striking, but surely even the Office for National Statistics must have growth for the sector in the fourth quarter when it produces its first estimate later this month. The PMI for services edged up again, from 56.6 in November to 56.8 in December. The index in the fourth quarter was at its strongest since the second quarter of 2007, before the crisis hit.

Meanwhile the Nationwide said consumer confidence slipped in Decmber, which on the face of it is hard to square with the evidence of booming Christmas and post-Christmas sales. Confidence fell by five points to 69, which the Nationwide thinks may be a reaction to the Pre Budget Report and expectations of future tax hikes. More here.

The first data readings for 2010 (though they apply to the final months of 2009) are pretty good, suggesting the economy has some reasonable growth momentum. The purchasing managers' index for manufacturing jumped to 54.1 in Decmber from 51.8 in November and easily exceeded consensus expectations. Output, new orders and employment all improved, strongly suggesting that manufacturing will have made a contribution to growth in the final quarter of 2009.

Meanwhile, Bank of England figures showed mortgage approvals for house purchase up to 60,518 in November, from 57,718 in October. This was the highest since March 2008. Overall mortgage lending rose by £1.5 billion. More here.

Or at least as merry as it can be, to all Economics UK users.

Nothing much happened at the Bank of England's monetary policy committee (MPC) meeting earlier this month, Bank rate being left unchanged at 0.5% and the £200 billion programme of quantitative easing being maintained. Members noted that the flow of activity data is mixed and that there is uncertainty about how much of the VAT reversal is passed on in January. That will determine whether Mervyn King has to write another open letter to explain why inflation has topped 3%.

The big disappointment is the money supply, which remains weak. Does that argue for more quantitative easing or a decision to suspend it because it isn't working? We will not know until February. The minutes are here. Meanwhile, the British Bankers' Association said mortgage approvals rose by more than 2,000 to a two-year high of 44,713.

The Office for National Statistics is engaged in a slow striptease when it comes to the question of when the UK economy emerged from recession. The latest revision has GDP down 0.2% in the third quarter, from a preliminary estimate of 0.4% and an interim calculation of 0.3%. The 0.2% was slightly worse than would have been expected from a straight read across from the stronger construction numbers the ONS had suggested would result in a 0.1% decline. Weaker services, down 0.2% instead of 0.1% (despite stronger surveys) appears to make up the difference.

Looking at the expenditure data, consumer spending (up 0.1%) - despite a jump in the saving ratio from 7.6% to 8.6% - investment (up 2.2%) and government spending (up 0.2%) all rose in the third quarter, as did exports, up 2.5%. So why did GDP decline? Imports rose slightly faster than exports and inventories apparently plunged again. In time, we will see that GDP rose in the third quarter. More details here.

The easiest way to sum up the Bank of England's Financial Stability Report is that things are much better but a long way from normal. Here it is in the Bank's own words.

"The financial system has been significantly more stable over the past six months, underpinned by the authorities’ sustained support for the banking system and monetary policy measures. Low risk-free interest rates and reduced uncertainty among investors have led to a rebound in a range of asset prices. Activity in many capital markets has resumed, reducing financing risks for some
borrowers. The market rally has boosted bank profits and lowered concerns about potential future losses, and banks have raised further external capital. As solvency concerns have eased, banks have been able to issue unguaranteed term debt, helping them to reduce their reliance on short-term funding.

"But overstretched balance sheets will take time to adjust fully. Around the world, a number of borrowers, including in the commercial property sector, have large refinancing needs in the coming years. And while funding costs remain low, there is a risk of market participants building excessively risky positions, which could unwind abruptly when yield curves eventually rise. Banks need to reduce leverage further, extend the maturity of their funding and refinance substantial sums as official sector support is withdrawn. While their profitability is relatively buoyant and market conditions are broadly favourable, banks should take the opportunity to do so. That will reduce the risk of disruption to the flow of credit in the future."

The report overview is here.

The fact that Novemebr's borrowing figures were slightly less bad than the markets had expected showed how gloomy the markets have become about Britain's public finances. One milestone in today's numbers was that public sector net debt exceeded 60% of gross domestic product for the first time (60.2%).

Public sector net borrowing, at £20.3 billion, was a November record, and the cumulative total for this fiscal year is now £106 billion, compared with £49 billion in the corresponding period of 2008-9. There are four months of the fiscal year to go, so to meet the Treasury's £178 billion forecast, borrowing over that period has to be £72 billion. A year ago over the corresponding period it was £36 billion. It will be close. More here.

Also today, the Bank of England said lending to businesses remained weak, though the lenders cite weak demand for borrowing. More here. Business investment was revised from a 3% fall in the third quarter to one of 0.6%, which will add to the case for a third quarter GDP revision.

After strong weekly readings from John Lewis and others, the 0.3% drop in retail sales volume last month was a surprise, partly offset by an upward revision to the October numbers. Even so, sales are 3.1% up on a year earlier, and should be boosted by some pre-VAT rise spending this month. More here.

Meanwhile, I'm never sure what value to place on the Bank of England's quarterly inflation expectations survey but for what it's worth, expectations for the next 12 months were steady at 2.4%. Suspicions about this survey arise from the fact that people think inflation is currently 3.2% and fewer than half think interest rates have fallen over the past 12 months. More here.

Britain's labour market statistics continued to confound gloomy expectations, with the wider Labour Force Survey measure remaining just below 2.5m, after a rise of just 21,000 in the August-October quarter, the smallest since the spring of 2008. In fact this total reached a plateau of just below 2.5m 3-4 months ago. The unemployment rate was unchanged at 7.9% while employment, driven by a big increase in part-time work, rose by 53,000 to 28.93 million.

Most eye-catching of all was the fact that the claimant count fell by 6,300 to 1.63m, its first drop since February 2008. All very good news, consistent not only with a recovering economy but also a flexible labour market. More details here.

Consumer price inflation rose from 1.5% to 1.9% last month, a little more than expected, largely because petrol prices rose a little this year but fell sharply a year ago. The rise in the consumer prices index between October and November, 0.3%, was modest. RPI inflation went from minus 0.8% to plus 0.3%, while RPIX inflation went up from 1.9% to 2.7%, just above its old 2.5% target. More details here.

Inflation will rise further in December, to around 2.5%, and will be hard to keep below 3% in January, unless price reductions are big enough to compensate for the rise in VAT back to 17.5%.

Everybody who has studied economies will have come across Paul Samuelson, if only because of his textbook, first published more than 60 years ago, and the most successful, in terms of sales and longevity, in any subject. Samuelson, who won the Nobel Prize in 1970, was also hugely influential within the subject, publishing more than 500 research papers and surviving the backlash against Keynesianism. The Times obituary is here.

It is easy to forget that the Bank of England's monetary policy committee met today, left Bank rate unchanged at 0.5% and decided to continue with the £200 billion of quantitative easing so far agreed. But when you read that sentence, just remember how remarkable it is. Even a year ago, a 0.5% Bank rate and QE, something that the Japanese had once tried with mixed success, would not have been on most people's expectations for 2009. It shows that we are still a long way from normal.

In any budget or pre-budget report it is important to distinguish between what we already knew and what is genuine “news”. Until the weekend, it would have been news that the Treasury was planning a windfall tax on bankers’ bonuses but that got out. So the one bit of additional news was a 0.5% increase in National Insurance from April 2011, on top of the 0.5% rise already planned. This increase, like much else in the PBR, is tilted towards the higher paid by protecting those on low incomes.

Alistair Darling chose, no doubt for political reasons, to present this as the price necessary to pay for protecting “frontline” public services; hospitals, schools and the police. The markets would have liked him to sell it purely as the first down-payment in what will be a series of measures to get the budget deficit down.

The public spending numbers in the pre-budget report are tough; the 0.8% real increases in current spending from 2011 will turn into deep departmental cuts when debt interest and the costs of unemployment are taken into account. Public sector pay increases will be limited to 1% for two years from 2011 (which will create a fuss among the unions). Public sector workers - particularly the higher-paid - will eventually have to pay more for their pensions.

The language on public spending was not, however, tough. This was a chance for Darling to spell out, for the benefit of the markets and the public, just how much of a new era the economy is entering. He chose not to do so.

The macro numbers were unexciting. Quite why the Treasury bothered to revise up this year’s borrowing total from £175 billion to £178 billion is not clear, other than to demonstrate to outsiders that they have done the sums and concluded that not much has changed. That £178 billion is equivalent to 12.6% of GDP, because GDP is smaller than the Treasury expected (a 4.75% decline this year rather than the 3.5% predicted at the time of the budget).

Otherwise, it is more or less the same story as before. Borrowing edges down to £176 billion in 2010-11 (also up by £3 billion compared with the budget), then £140 billion, £117 billion and £96 billion. The last of these will represent 5.5% of GDP, thus meeting the aim, enshrined in the Fiscal Responsibility Bill, of halving the deficit over four years. Public sector net debt is seen rising to 77.7% of GDP by 2014-15.

Has the PBR taken us much further? There are some inevitable efficiency savings, coupled with some genuine savings from holding down public sector pay. But we are still more or less in the world we were before this. The Treasury is taking the fact the independent forecasters have moved into line with its 2010 growth forecast, 1.25%, as good reason to stick with its aggressive predictions for 2011 and 2012, both 3.5%. Officials will argue that even if these prove to be over-ambitious they have based their revenue projections on cautious assumptions.

Even so, we have moved full circle in the space of the past couple of weeks on this PBR. Everybody thought it would be a holding operation, then talk turned to something much bolder in the past few days. It was, after all, a holding operation, which does not change very much at all.

Britain's overall trade deficit widened to £3.2 billion in October, from £3.1 billion in September, though the latter was revised down from an original estimate of £3.5 billion. The trade deficit in goods increased from £6.9 billion to £7.1 billion. Exports are doing pretty well, up by 3.8% in volume between September and October, but this was outstripped by a 4.1% increase in imports. More here.

Manufacturing output stagnated in October, disappointingly, and showed a fall of 7.8% on a year earlier. Overall industrial production was also flat and showed an annual fall of 8.4%. Manufacturing showed a three-monthly fall of 0.5%, overall industrial production a hefty 1.4% drop. The picture will look better when the weak August number drops out of the calculation but still represents a feeble upturn. More here.

House prices, meanwhile, showed a hefty 1.4% rise in November according to Lloyds Bank/Halifax. On the Halifax's way of calculating it, this was still 1.6% lower than a year earlier, though on a raw basis prices in November were up 1.8% on November 2008 and significantly higher than in December 2008. More details here.

Outside the sector, not many people take that much notice of the quarterly construction figures. The latest, however, have added significance. The Office for National Statistics estimates that construction output rose by 2% in the third quarter, rather than the 1.1% fall it assumed in the third quarter gross domestic product figures. Other things being equal, that change will add 0.2% to the growth in GDP between the second and third quarters, cutting the quarterly decline from 0.3% to 0.1%. It may not be that long before we discover that the economy grew in the third quarter, as the surveys suggested. The construction figures are here.

Though the service sector is still firmly in expansionary territory, its purchasing managers' index slipped from 56.9 to 56.6 in November. That is consistent with a healthy rate of expansion (levels above 50 show this) and supports the idea that the economy as a whole is growing again. But growth is not racing away. The good news was that job losses in services fell to a 14-month low.

Two interesting speeches from MPC members. Spencer Dale, its chief economist, voted against the extension of quantitative easing last month. He thinks the economy has turned the corner into growth and acknowledges the possibility that Mervyn King might have to write a letter explaining why inflation has risen abover 3% in January.

In the speech, he explains why he did not vote for a QE extension: "My main concern reflected the considerable uncertainty about the degree of spare capacity in the economy and the behaviour of inflation when output is growing at above trend rates. These uncertainties are always present, but come to the fore in situations like the current environment in which there is a very substantial degree of economic slack. In order to keep inflation on track to hit the inflation target this slack needs to be eliminated. However, given the uncertainties about the precise margin of spare capacity and the behaviour of inflation as this spare capacity is being closed, my preference was to aim to grow the economy a little less rapidly.

"I was also concerned that further substantial injections of liquidity might result in unwarranted increases in some asset prices. I should stress that I do not think there is any strong evidence to suggest that any of the increases in asset prices seen to date are out of line with the improving economic outlook and the desired impact of our asset purchase programme. Rather, I was conscious that the current stance of monetary policy – in which Bank Rate is very low and substantial amounts of liquidity are being injected into the economy – increases the likelihood that asset prices may move out of line with their fundamental values and that this could be costly to rectify were it to occur. It is a risk that we need to be alert to." His speech is here.

Adam Posen, another MPC member, set out some ideas about controlling bubbles other than through monetary policy, which he said would always be problematical. One way might be to vary housing taxes over the cycle to control booms "It would mean having already existing title fees, capital gains taxes, stamp and transfer taxes, varying over time in line with price developments in the housing market more broadly," he suggested. An interesting approach. The speech is here.

Also of interest this week was that Willem Buiter, an ex member of the MPC, has been appointed chief economist of Citi. Sadly it means that Buiter, for whom the word maverick could have been invented, will have to be a little constrained. As he writes on his soon-to-be-closed Maverecon blog:

"When I served on the Monetary Policy Committee of the Bank of England (between 1997 and 2000) and during my years as Chief Economist and Special Counsellor to the President of the European Bank for Reconstruction and Development (2000 till 2005), I was constrained in what I could say and write in public by institutional loyalty and the moral and professional obligation not to damage the organisation I served. Unlike my Maverecon blog, my writings and public statements of those years therefore don’t contain words like ‘complete bollocks’.

"The joys of academic freedom and irresponsibility include the ability to participate in public debate using expressive, forceful language, strong metaphors, analogues and similes, to go over the top from time to time, to overstate the case and over-egg the pudding and not to worry about giving offense to the high and mighty. Because of their sheltered existence, academics can be reckless with impunity in their excursions into the forum of public opinion.

"Inevitably, during my years with the MPC and the EBRD, both the form and substance of my public statements were more constrained than during my academic episodes before and after. The same will be true during the years to come with Citi."

The purchasing managers' index for manufacturing fell back from 53.4 in October to 51.8 in November, indicating that the sector is expanding (the index is above 50) but at a slower rate. Though the markets expected better, some payback was probably inevitable after October's strong rise. Export orders were strong, domestic orders much less so.

The Nationwide Building Society, meanwhile, said house prices rose by 0.5% in November and were 2.7% up on a year earlier. Given the sharp fall in December 2008, even a flat reading this December would see annual house price inflation exceed 5%. The monthly rises have clearly slowed since the summer, suggesting prices are entering a softer phase, though that is a long way from the sharp falls of a year ago. More details here.

Bank of England data showed a modest rise in monthly mortgage approvals, from 56,205 in September to 57,345 in October. The eye-catching figure, however, was a £0.6 billion fall in consumer credit. It means another fall in the total owed by individuals to the banks. Debt has levelled off in the past year. More details here.

Also, the Bank said that M4 lending was broadly flat in October, excluding the effect of securitisations, and that its growth rate was "less negative" at 3.2%. A small comfort. More here.

Revised GDP figures for the third quarter showed the economy declined by 0.3%, against the preliminary estimate of 0.4%, but remained in recession. As I commented at the time of the original estimate, the Office for National Statistics appeared to have accentuated the negative by projecting a 0.2% decline in service sector output in its initial estimates. It has revised this to 0.1% but that still looks on the low side.

Odder than that is the fact that GDP in nominal terms rose by 1% between the second and third quarters, while GDP in volume terms fell by 0.3%. Unless we had a sudden surge in inflation that everybody missed, that looks hard to reconcile. More details of what remains a GDP mystery here.

Business investment has fallen sharply in this recession, dropping by 3% in the third quarter for a fall of 21.7% on a year earlier. The 12-month fall in manufacturing investment was 28.9%. At least the latest fall in business investment was smaller than the 10.2% drop in the second quarter. More details here.

Meanwhile, figures from the British Bankers' Association showed that mortgage approvalks edged up only modestly, from 42,073 to 42,238. Consumer credit declined. More details here.

You'll need to log on to the FT site to read the two articles but an interesting little spat has broken out at the paper over whether the government should introduce a windfall tax on bank bonuses. His argument was that the bonuses are a direct result of taxpayer support for the banking industry and so taxpayers are entitled to get some of their money back.

The FT's Lex column disagrees. Today it writes: "In 1360, notes the Bank of England's Andrew Haldane, a Barcelona banker was executed in front of his failed institution to discourage others from excessive risk-taking. In the UK, the mob is today once again baying for blood. Some want to buy it off with a one-off windfall tax on bonuses. "Try it: millions will love it," Martin Wolf, the Financial Times' chief economics commentator, wrote yesterday. Slim chance. If there had been any interest in this populist gimmick, it would have featured in this week's Queen's Speech. Even this desperate Labour government knows better.

"Any windfall tax on bonuses would be a futile gesture: it would almost certainly be revenue-negative for the government and, if implemented unilaterally, damaging to Britain's most competitive industry. Not only would the remarkable number of high earners who are non-doms escape any punitive levy; but to the extent that a new marginal tax rate of, say, 80 per cent on income over £150,000 was seen to be unfair, it would also be avoided. If the risk of it being repeated were high, it would encourage the most productive professionals to leave these shores."

I like the image of Martin Wolf being part of an angry mob. The Treasury has been cool on the idea of any kind of windfall tax though it is angered by the return of big bonuses and not sure what to do about it, apart from giving the Financial Services Authority new powers of intervention in remuneration. If all goes according to plan for the banks, bonuses in 2-3 years' time could be very big indeed.

The spin the OECD put on its new forecasts was that growth would not be strong enough for a while to halt the rise in unemployment. Even so, it has significantly revised up its numbers, raising its 2010 forecast for OECD growth from 0.7% to 1.9%. Growth wil further accelerate to 2.5% in 2011 it expects. A detailed handout is accessible here.

News on the demand side of the economy was relatively good, retail sales rising by 0.4% in October for a 3.4% rise on a year earlier. Sales volume in the latest three months was up by 1.1%. Clothing sales appear to have been particularly strong in October. Household goods stores saw a 3.8% rise over the latest three months, partly reflecting the continued upturn in housing. Bank of England figures showed mortgage approvals up from 56,000 to 61,000 - almost to the level normally consistent with stable prices. More on the retail sales here.

The public finances were marginally disappointing, with net borrowing of £11.4 billion in October, compared with £0.1 billion a year earlier, and a current budget deficit of £7.7 billion, compared with a £2.2 billion surplus in October 2008. Though the figures were a touch disappointing, £86.9 billion of borrowing for the first seven months of the fiscal year does not obviously suggest a need for an upward revision of the Treasury's £175 billion forecast for the full year, particularly with VAT set to rise in the new year. More details here.

That's what Professor Chris Berry of the University of Glasgow, Smith's alma mater, claims to be able to do. His talk can be accessed here.

The minutes of the Bank of England monetary policy committee's November meeting revealed a little bit of division on quantitative easing, seven members voting for a £25 billion increase to £200 billion, one (Spencer Dale) for no change and another (David Miles) for a £40 billion increase to £215 billion. The minutes also suggested that there will be no addition to the agreed amount (£25 billion) until February.

The markets were also interested in the fact that the committee discussed a cut in the rate on commercial bank reserves at the Bank, which it suggested "would bear down on short-term market rates, and could ease monetary conditions further". While concluding that the impact would be small and that QE was a more effective way of operating, this is one to look out for. The minutes are here.

Also today, the Bank released the numerical parameters of its new forecasts. Growth will peak at 4.3% in the second quarter of 2011, its modal projections suggest. The mean is lower, 3.3%, but still pretty healthy. The projections are here.

Consumer price inflation rose to 1.5% in October, from its low of 1.1% in September. Retail price deflation eased from 1.4% to 0.8%, while RPIX inflation was up from 1.3% to 1.9%. The base effects that were so helpful in the past few months are now turning. The biggest will be the rise in VAT back to 17.5% in January. The figures have no implications for policy, however, given that the Bank of England has said it will look through this rise. More details here.

Germany is growing well, with gross domestic product up 0.7% in the third quarter, France slightly less so, 0.3%. Italy has also returned to growth, with a 0.6% third quarter GDP rise. The upshot is that Eurozone growth in the third quarter was 0.4%, following a 0.2% decline in the second quarter. EU growth as a whole was 0.2%, despite being dragged down by Britain's apparent 0.4% GDP fall. More details here.

Though Mervyn King sounded downbeat at the press conference and refused to rule out further asset purchases under the quantitative easing programme, the Bank's new forecasts are more upbeat and predict higher inflation, compared with three months ago. In particular, the Bank's fan charts suggest growth will recover to around 4% over the next couple of years. But it seems to be retaining its dovish stance on policy. The inflation report is here.

Unemployment figures, meanwhile, continued the very encouraging recent pattern. The new Labour Force Survey total for July-September, 2.46m, suggests unemployment fell in both August and September, The LFS rate dropped from 7.9% to 7.8%, and employment rose by 6,000 over the latest three months. Pay growth was very weak at 1.2% but these numbers represented very good news. More here.

Exports are up but so are imports, according to the latest trade figures, which show the trade deficit in goods and services widening from £2.2 billion in August to £3.5 billion in September. Exports rose by £0.7 billion on the month, imports by £1.9 billion. In the latest three months, export volumes rose by 2.4%, imports by 3.2%. Both were substantially down, however, by 12.8% and 13.5%, on a year earlier. More details here.

I had suggested £30 billion, the Bank has gone for £25 billion, and what's a few billion these days? Today's announcement takes the quantitative easing target up to £200 billion and continues the strategy of gradually reducing the additional stimulus, assuming this holds for the next three months. That's probably right.

The Bank has emphasised both the stock and the flow of asset purchases and it is assuming economic recovery, notwithstanding the numbers from the Office for National Statistics. "A number of indicators of spending and confidence, however, suggest that a pickup in economic activity may soon be evident.," it said. The Bank's announcement, which also left interest rates unchanged at 0.5%, is here.

Manufacturing output jumped by 1.7% between August and September as factories recovered from summer shutdowns. Overall industrial production rose by 1.6%. These were better than the Office for National Statistics had allowed for in the GDP figures but earlier data revisions mean they have no implications for those initial GDP estimates. While manufacturing output slipped by a modest 0.1% in the third quarter, overall industrial production was down by 0.8%, hit by weak energy output. More details here.

Meanwhile, new car registrations in October were 168,942, an impressive 31.6% rise on a year earlier. Scrappage has worked, and business buyers may also be making a comeback. More here.

The service sector purchasing managers' index recorded another strong rise, up 1.6 points to 56.9, and is now above its long-term average of 56.2. This is powerful recovery evidence. Also today, the Markit report on jobs showed a rise in its permanent placements' index from 51.3 to 54.6, its highest in two years.

On the face of it, these surveys suggest the Bank of England's work is done. I suspect, after recent disappointments in the official data, the monetary policy committee won't see it quite that way.

The Halifax has taken to publishing its house price index when you least expect it. Today's lunchtime release showed that prices rose by 1.2% in October, their fourth consecutive monthly rise. They are up by 2.9% since the end of 2008 and by 7.1% from the April lows, putting them on course for a 2009 rise. Prices are still marginally lower than a year ago (1.5% on a strict 12-month basis) but the gap is closing. All the usual caveats about limited supply apply. More here.

News on the construction industry was not so good, its purchasing managers' index dropping from 46.7 to 46.2, further below the 50 level consistent with expansion. This was in contrast to Monday's manufacturing PMI, which rose from 49.9 to 53.7.

The most significant bit of economic news of the week was US third quarter GDP, up an annualised 3.5%. Most of the world, including I think Britain on any reasonable basis, has returned to growth.

More parochially, the Nationwide reported a 0.4% rise in house prices for October, after 0.9% in September. Supply and demand may be coming back into better balance, which is a healthy development. The rise was enough to produce the first annual rise in house prices, 2%, since March 2008, and to cut the fall from the peak to 13.1%. More here.

Goldman Sachs has put out a note on the GDP figures headed "Unbelievable. Literally", which points out the that the early estimates of GDP in the UK have a correlation of just 0.1 with the final data. Bizarrely, there is a closer correlation between first estimates of Eurozone GDP and the final UK numbers than the Office for National Statistics' first stab.

Looking at the data, one big shock came from services and the ONS's guesstimate of a 0.2% drop in the sector, which has a weight of 759 in 1,000 in the output-based GDP figures. The ONS thinks the index of services averaged 104.5 in the third quarter and has published figures showing monthly estimates of 104.9 and 104.6 for July and August.

That means a hefty 0.6% drop between August and September, at a time when the surveys were suggesting a return to strong growth for the sector. So something odd is happening, particularly as the ONS has little service-sector information of its own for September. If Q3 service sector output turned out to be merely flat, that would halve (subject to rounding) the estimated GDP fall in the quarter. If it bounced back only a little, the fall would be eliminated. A lot of ink has been spilt over some odd looking first estimates.

The debate was over whether the third quarter gross domestic product numbers would be flat or show a small increase. In the event, the Office for National Statistics came out with another bizarre figure, a decline of 0.4%. True, August industrial production figures showed a surprise slump but this looked like a temporary and immediately reversible change. Pretty well everything is down on the quarter in these numbers; industrial production by 0.7%, services by 0.2%. Only government spending was flat. More details here.

Retail sales in September were weaker than the surveys had suggested. They were flat, as in August, though for the third quarter as a whole there was a 0.9% rise in volumes. Interestingly, non-food sales, including housing market sensitive household goods' sales, were stronger than food sales over the quarter. More details here.

The minutes of the Bank of England monetary policy committee's October meeting were mildly upbeat in tone but gave few clues on future policy. The next meeting, on November 5, is the key one for quantitative easing. The minutes are here.

There was rather more meat in Mervyn King's speech on Tuesday evening. Remember his 'moral hazard' worries at the start of the crisis two years ago? He's even more worried now that governments have shown themselves willing to prop up banks, and fears that could encourage even more risk-taking.

"It is hard to see how the existence of institutions that are “too important to fail” is consistent with their being in the private sector," he said. "Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don’t, distorts the allocation of resources and management of risk."

Does that mean state banks or a break-up of existing ones? Like Adam Posen at the weekend, he thinks the UK's banking system is far too concentrated. The speech is here. Finally, the CBI's industrial trends survey is reasonably upbeat.

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The monthly horror show represented by Britain's public finance statistics turned out to be slightly less horrific than feared. Only slightly though. Net borrowing was £14.8 billion last month, slightly slower than the £15.5 billion consensus. The August figures were revised a little lower.

So far in the current fiscal year net borrowing is £77.3 billion, compared with £33.8 billion for the corresponding period of 2008-9. On a pro rata basis (comparing with last year) that would point to an overshoot of the Treasury's £175 billion forecast but there are good reasons to think there may be more front-loading than usual, particularly if VAT goes back up on January 1.

More details here. Public sector net debt is now 59% of GDP, £825 billion, including the cost of the banking rescues.

Any rise in unemployment is unwelcome but the latest figures were encouraging, showing a smaller than expected rise in the claimant count, 20,800, and a much smaller rise in the Labour Force Survey measure, 88,000 over the latest three months, than expected. Those of us who said the LFS would follow the claimant count in showing that the pace of the jobless rise was slowing have been proved right.

On the LFS measure, unemployment remained just below 2.5m, having been expected to rise above it. Its 88,000 rise to 2.469m for the June-August period compared with a 271,000 increase in the March-May period. The unemployment rate stayed at 7.9%. Interestingly enough, the unemployment level initially reported a month ago, covering the May-July period, was 2.47m, suggesting if anything that on this measure unemployment has slipped a little, though that is probably pushing it given the nature of the data. The claimant count level was 1.63m, and the rate ticked up to 5%.

Average earnings growth remained low. but again was not as weak as expected. Excluding bonuses, the rate was 1.9%, the lowest since the current series began in 2001. Including bonuses it was 1.6%. More details here.

Inflation did not fall quite far enough for Mervyn King to have to write a public letter of explanation but the drop to 1.1% was more than the markets expected, the first time this has happened for quite some time. It fell from 1.6%. RPI inflation was negative by 1.4%, from 1.3%, while RPIX inflation, excluding mortgage interest payments, dropped from 1.4% to 1.3%.

The big price falls were in essentials; gas and electricity, food and non-alcoholic drink. This probably represents the inflation low point but suggests next year's post-VAT peak will be lower than some feared. More details here.

The goods and services trade deficit narrowed to £2.3 billion in August, from £2.6 billion in July, while the deficit on goods came down from £6.4 billion to £6.2 billion. Mildly encouraging data, though in August itself imports rose faster than exports. More here.

Producer price inflation turned positive, with a 12-month rise of 0.4% in output prices, 1.4% on 'core' output price inflation. Input prices were 6.5% lower than a year earlier, suggesting some rebuilding of margins. More here. Also today, the FT Acadametrics house price index rose by 0.6% in September, for a 12-month fall of 5.6%.

And an easy one for analysts. If anybody was expecting anything other than Bank rate being maintained at 0.5% and continuing with the £175 billion quantitative easing programme, they shouldn't have been. The Bank's statement is here, though it doesn't say anything.

Just when the recovery story was going smoothly, along comes the Office for National Statistics to throw a huge spanner in the works. Manufacturing output slumped by 1.9% in August, it said, to the lowest point in the recession. Industrial production as a whole dropped by 2.5%. There is a good chance that at least some of these falls will be reversed in September, August shutdowns appearing to play a significant part and, even with these numbers, overall industrial productions was only down by 0.2% in the latest three months. Even so ... More here.

The Halifax, meanwhile, reported a 1.6% rise in house prices in September. Prices the way Halifax measures them (the three-month average) are still 7.4% lower than a year ago. On a straight month basis, they are 5% lower, so some way behind the Nationwide. More here.

The purchasing managers' index for the services sector rose from 54.1 in August to 55.3 in September, its highest for two years and beating market expectations. While the usual health warning applies about the relationship between the surveys and official data, this clearly suggests a return to growth for the sector, and for the economy as a whole.

Also out today, the CBI reported the first growth in financial services volumes for two years. Its quarterly survey is here.

The Nationwide building society said house prices rose by 0.9% in September and are now back to September 2008 levels. The average house price is £161,816. On a seasonally adjusted basis, prices are up by 7.2% on their February low point, and by 4.1% on December last year, suggesting they are on course for a 2009 rise. More details here. Prices are still 14% below their October 2007 peak.

Meanwhile the Bank of England reported a net housing injection (negative housing equity withdrawal) of just under £7 billion in the second quarter, 2.9% of post-tax income, just below the £7 billion-plus figures for the two previous quarters. Details here.

Britain's manufacturing sector was never gong to roar back into life so news that the purchasing managers' index for manufacturing slipped from 49.7 to 49.5 should not be too concerning. Exports at least appear to be benefiting from the weak pound.

There was better news from the Bank of England's credit conditions survey, which showed that availability of credit to companies is improving, that they are expected to do so further over the next three months for both companies and households and that default rates are lower than expected. More details on the survey here.

Gross domestic product fell by 0.6% in the second quarter, from a previous estimate of 0.7% and an initial 0.8%, so the revisions are heading in the right direction. The change was expected following new estimates of construction output. More revisions can be expected in the coming months. As things stand, the figures show the GDP fall over 12 months to be 5.5%.

There is a wealth of information in these quarterly national accounts. One highlight is what was happening to the personal sector. Real personal disposable income rose by a healthy 0.9% in the second quarter, while household expenditure overall dropped by 0.6%. The saving ratio rose, as expected, from an upward-revised 3.9% in the first quarter to 5.6% in the second. Last year it averaged only 1.7%. The household sector has adjusted a lot. More details here.

The minutes of the Bank of England monetary policy committee's September meeting are more notable for what they did not say than for what they did. The committee voted unanimously to keep Bank rate at 0.5% and persist with the £175 billion programme of quantitative easing ((QE). There was no discussion of what the markets had been looking for, hints of when, or if, the Bank might cut the interest rate on commercial bank reserves.

The Bank did say that inflation is likely to fall for one more month, before rising "sharply" as temporary effects drop out. The implications of this for policy do not appear significant, however. The minutes are here. Also worth looking at is the Bank's Quarterly Bulletin article on sterling, which caused a certain amount of fuss earlier in the week. It is here.

The August UK public finances were no worse and on some estimates a little better than expected, though everything is relative these days. Public sector net borrowing was £16.1 billion, compared with £9.9 billion a year earlier. The current budget deficit ws £12.8 billion, up from £7.7 billion. Public sector net debt is now £804.8 billion, up from £632.8 billion. As a percentage of GDP the rise over the past year is from 44% to 57.5%. The numbers suggested the government is broadly in line with the Treasury's £175 billion borrowing forecast. But these are early days - and that is a very big number. More here.

Meanwhile, the Bank of England released both its trends in lending report and broad money figures for August. Both were weak. M4 and M4 lending increasing by 0.1% on the month. More on the Bank site.

A couple of quick points on the great spending row. First, it explains why Alistair Darling, who knew the numbers, was so uncomfortable with Gordon Brown's "Labour investment versus Tory cuts" line.

But second, these numbers are not yet set in stone. The Treasury's assumptions on social security payments and debt interest may be pessimistic, in some cases because it is required to use outside forecasts. That is also true of some of the assumptions underlying the tax projections. So, even if the official growth numbers look optimistic, the public finance projections are probably not and may err on the side of caution. Let's hope so anyway.

Third, quite a lot of the assumed cuts in departmental spending - more than a third - are from cuts in capital budgets, which is always what politicians looking to cut target first. A significant squeeze is also built in for current spending, however, which will also be necessary. The Institute for Fiscal Studies, as always, is good on this. Its report is here. Also worth looking at Vince Cable's deficit reduction programme, which has some sensible proposals. It is here.

Meanwhile, retail sales were flat in August, though 2.1% up on a year earlier. Not bad in the circumstances. Here's more from the ONS.

Unemployment rose, as expected, but the Labour Force Survey measure remained just under the 2.5m level, at 2.47m, and the rate rose from 7.8% to 7.9%, just short of the expected 8%. The claimant count continued the pattern of relatively small rises, the claimant count increasing by 24,400 to 1.61m, or 5% of the workforce.

There were one or two other mildly encouraging figures in the release. Redundancies in the three months to July were 246,000, down 55,000 on the previous three months. Vacancies edged up marginally in August.

Earnings growth excluding bonuses slipped from 2.5% to 2.2%, the lowest in the current run of data, which stretches back to 2001. Including bonuses, earnings rose by 1.7%. Flexibility on wages looks to be limiting the rise in unemployment. More here.

Consumer price inflation dropped from 1.8% to 1.6% in August, slightly above expectations, though the lowest since January 2005. It should fall again next month, to just above 1%. Lower food and energy prices were responsible for the fall, with "core" inflation staying at 1.8%.

RPI inflation is no longer benefiting from falling house prices. Its negative rate was 1.3%, up from minus 1.4% in July. RPIX inflation, the old target excluding mortgage interest payments, rose from 1.2% to 1.4%. More here.

Meanwhile, in his opening statement to the Commons Treasury Committee, Mervyn King said growth had resumed but that the path of recovery was uncertain and the risks to inflation remained on the downside.

This is part of what he said: "Following a precipitate fall in economic activity at the end of last year and the start of this, there are now signs that growth has resumed in the third quarter. Inflation over the next year is likely to be volatile. But looking further ahead, the strength and sustainability of the recovery is highly uncertain and the balance of risks to inflation around the 2% target remains on the downside."

Speculation beforehand that the Bank of England might introduce a Swedish-style negative interest rate on commercial bank reserves proved unfounded, as expected. Bank rate was left at 0.5% and the £175 billion programme of quantitative easing maintained. The Bank's unexciting statement is here.

Official industrial production figures for July suggested strongly that the economy is on course for growth in the third quarter. The 0.5% rise in industrial production between June and July left it 0.9% higher than its second quarter average, suggesting a significant relapse would be needed in August and September not to produce quarterly growth.

Manufacturing output rose by 0.8% between June and July and also looks set for quarterly growth, in line with the surveys. Note that these are the Office for National Statistics' calculations of the monthly changes - when you work them out on the basis of the index numbers, the results are slightly different. More details here.

You can never have enough economics, particularly at a time like this, and Ed Conway, economics editor of the Telegraph, has written a commendably comprehensive and concise book setting out 50 of the most important ideas in economics.

Each of the ideas is set out over just two pages, proving that you do not need to swamp the reader to get the point across. It is one of a series covering everything from management to mathematics, physics to philosophy. The book is available here.

The OECD, in an interim assessment of the economic outlook, says Britain's GDP will show a small decline in the current quarter and that it will be flat in the final quarter of the year, for an overall GDP fall of 4.7% this year, similar to Germany, 4.8%, but worse than America (2.8%), France (2.1%) and the G7 average (3.7%). The assessment is here.

The UK forecast sits oddly alongside the purchasing managers' survey for services, also out today, which showed a rise from 53.2 to 54.1, a level consistent with growth in the sector of 3%. This survey, taken together with those for manufacturing and services, suggest the economy returned to growth a couple of months ago.

All day yesterday, and this morning, the BBC reported that we had seen the first fall in household debt since 1993, when the current series began. Many of Wednesday's newspapers said the same. Yet that is plainly not the case. The Bank of England's figures, here (column VTXC) show we have had six monthly falls in outstanding debt owed by individuals in the past 12 months.

Why the confusion? It is understandable. What we did have was the first fall in the flow of net lending on record. It dropped by £635m. Logically, you might expect the flow to equate to the change in the stock. But that is not the case, for reasons the Bank sets out deep in the details of its release.

"Changes in a series between one period and the next (referred to as ‘flows’) do not always equate to the difference between successive amounts outstanding," it says. "The starting point for calculating changes is the difference between these amounts outstanding but these are then ‘break-adjusted’ to form the flows. The reason for ‘break-adjustments’ is to remove the effects of factors that would otherwise distort the flow. Such adjustments bring the statistics into line with ‘transactions’ as defined by international standards for economic statistics (particularly the European System of Accounts, ESA 95)."

Debt can fall, it seems, even when the flow of net lending is rising.

The eyecatching figure from the Bank of England today was that net lending to consumers fell in July for the first time since comparable records began in 1993. Overall lending dropped by £0.6 billion, with net mortgage lending down by £0.4 billion. Note that this was not the first time overall personal debt, currently £1,456.9 billion, has fallen, as the BBC is reporting on its website - it has dropped four times this year, for example.

Mortgage approvals continued to rise, hitting 50,123 in July, up by 2,232 on June and more than 50% up on a year earlier. More details here.

The purchasing managers' index for manufacturing slipped from 50.2 to 49.7. Disappointing but still consistent with modest growth for the sector. Even so the data has started September in a somewhat downbeat way, as has the stock market, though that mainly reflects international developments.

The second quarter GDP numbers wrongfooted some City economists, who wrongly thought that exceptionally weak business investment figures for the quarter, released on Thursday, would produce a downward revision to the figures.

Top marks to Ben Broadbent and Kevin Daly of Goldman Sachs, who wrote this on Thursday: "Note that this number has NO bearing on tomorrow's revised estimate of Q2 GDP. At this stage, and for the next year, estimates of last quarter's growth depend solely on sectoral output data (manufacturing, services, construction, etc). To the extent the aggregate expenditure differs from this output-based estimate (they should in principle be exactly the same), the ONS will adjust inventory investment to bring the first into line with the second."

As it was the GDP fall in the second quarter was revised from 0.8% to 0.7%. The main implication of the business investment figures is that they reduce the potential gains from the inventory turnaround later, though the figures will almost certainly be revised. But we should still be on course for growth in Q3.

There's more on the Q2 GDP numbers here and those horrible business investment figures (to be taken with a pinch of salt) are here.

The fourth consecutive rise in house prices from the Nationwide, up 1.6% in August compared with July, is also the fourth in a row to show a rise of 1% or more. Just as the monthly falls were larger than normal in the downswing, so these are larger-than-normal monthly rises. The annualised rise over the past four months is more than 15% and prices are up by 6.3% from their February lows on a seasonally adjusted basis and by 8.4% unadjusted.

All the usual caveats apply about thin markets (as on the way down) and the risks from rising unemployment and weak mortgage lending. Nobody would expect prices to continue to rise at this pace. But the story of the housing market - a fall brought about by a sudden collapse in mortgage availability and a gradual return to more normal conditions - is intact. More details here.

A recovery in the US housing market is important for the American economy and a stabilisation in home prices is a necessary (but not sufficient) condition for a return to health of the financial system. Recent numbers on US home sales have been firmer and now the Case-Shiller index has recorded a second successive monthly rise in home prices.

Prices rose by 1.4% in June after a 0.5% increase in May. Further monthly falls may occur but the big correction looks to be over. The index rose in the second quarter, the first quarterly rise in three years. More details here.

Mervyn King is said to observe that having Tim Besley on the monetary policy committee (MPC) has provided an important bulwark for his desire to put a bigger emphasis on broad money, M4. This King-Besley alliance provided two out of the three of the minority at the August MPC meeting. The two, along with David Miles, wanted £75 billion of additional quantitative easing, essentially maintaining the £25 billion a month rate since March.

The majority on the committee, however, wanted a reduced rate of QE, and opted for an additional £50 billion. £25 billion is a lot of money but I don't see this disagreement as an important one of principle. Even £50 billion, after all, was more than the markets had expected. The minutes are here.

Consumer price inflation was unchanged in July at 1.8%, against expectations of a fall, while retail price deflation eased from 1.6% to 1.4%. Furniture and alcohol prices were mainly responsible for keeping inflation above expectations. The Bank of England, as we know, expects the CPI rate to fall in the coming months because of spare capacity in the economy. More here.

Yesterday's Sunday Telegraph contained an article, based on research from the think tank Policy Exchange, that Britain's private sector will be smaller next year than it was in 1998. Fascinating and alarming, if true. The article is here. The economic output of the private sector next year will be an inflation-adjusted £706.1 billion next year, it said, compared with £708.9 billion in 1998-99.

Fortunately it isn't true. The Policy Exchange calculations were based on a popular misconception, that of assuming government spending has risen to around 50% of GDP. Spending may be equivalent to 50% of GDP but that includes transfer payments that are not part of GDP. The G that goes into the national income identity - G + C + I + X - M - is around 20% of GDP (general government spending), plus government capital spending. The public sector has grown too much but it hasn't crowded out the private sector to quite that extent.

So what has happened to private sector output? The Office for National Statistics' estimate of market sector output was 27% higher in volume terms in the first quarter of this year than in 1998. It may fall a bit from there but it will still have shown considerable growth, as you would expect.

The advanced country recession is coming to an end. After France and Germany last week, now Japan has recorded growth in the second quarter. It will be disappointing if the United States, Canada, Italy and Britain do not see positive GDP in the third quarter.

Net trade made the biggest contribution to Japan's 0.9% growth in the second quarter, recovering from a spectacular collapse as export markets stabilised. Consumer spending also picked up but investment remained very weak. With deflation a reality in Japan (as in the eurozone), the question of how sustainable the upturn will be remains paramount.

Andrew Sentance of the Bank of England's monetary policy committee (MPC) filled my Sunday Times slot in my absence. This is his piece.

The Bank of England released its latest Inflation Report last Wednesday. Since the previous report in May, the Office for National Statistics has produced new estimates for GDP showing the recession has been deeper than thought. But looking ahead, there are grounds for optimism.

The big shock to confidence inflicted by the banking crisis last autumn appears to be fading and consumer and business confidence have recovered significantly during the first half of this year. The stock market has risen strongly since March and the housing market appears to be turning. We may also be seeing an easing in the rundown in stocks of unsold goods in key sectors of manufacturing industry.

I expect to see a return to growth in the second half of this year, as the UK economy responds to the stimulus from low interest rates, a competitive exchange rate, government tax and spending measures, an improving global economic environment and the Bank’s policy of quantitative easing. However, there are two big uncertainties over how quickly Britain will recover.

The first is the extent to which constraints on bank lending will hold back spending and business activity. In recoveries from previous post-war recessions, the banking system was in a much better position to boost lending than it is now. As banks remain cautious about new lending and seek to rebuild their balance sheets, there is a risk they could dampen consumer and business spending. The second big uncertainty is the momentum of recovery across the global economy.

Throughout my time on the Monetary Policy Committee, global economic developments have had a significant impact on the UK economy. The recession created by the global financial crisis is the most striking example — though this earthquake was preceded by a series of tremors in the international economy going back to the late 1990s: the Asian crisis; the bursting of the dotcom bubble; the impact of global terrorism and war; and a wave of energy and commodity price inflation in the mid-2000s.

Britain has always been a highly international economy, influenced strongly by its trade and investment links to other parts of the world. But in the increasingly globalised world economy of the 1990s and 2000s, these economic links became broader and stronger. Global manufacturing supply chains have linked the fortunes of Asia and other emerging economies to the spending patterns of consumers in America and Europe. At the same time, global financial markets have transmitted sub-prime losses in the American mortgage market to banks around the world.

These global economic links have not only played a large part in triggering the recession. They are also an important influence on Britain’s recovery prospects and the outlook for inflation. So what does the latest evidence suggest about the prospects for global economic recovery?

Three key points stand out. First, most advanced economies are showing evidence of a bottoming out that we have seen in Britain. In America and the eurozone, the downturn has eased significantly, according to GDP data for the second quarter, with Germany and France actually recording small rises in output.

Second, there has been a general turnaround in business surveys and confidence indicators. Surveys of purchasing managers, which are well-established barometers of business activity in leading economies, bottomed out in the early months of the year. As the chart above on the left shows, in manufacturing industry these indicators are now close to signalling modest growth. Other business surveys are consistent with this general picture of stabilisation and the prospect of a return to growth later this year.

Third, the upswing in the global economy is being led by Asia. The strongest economic indicators in recent months have been in Asian economies. China recorded a pick-up in annual growth from just over 6% in the first quarter of this year to nearly 8% in the second quarter. Both South Korea and Singapore have also recorded strong bounces in output. This week, India reported industrial production up nearly 8% on a year ago with strong readings from its latest business surveys.

It is tempting to be sceptical of these developments as the product of unreliable data (in the case of China) and a bounce in output driven by the stock cycle. But I believe there is a good case for a much more positive interpretation of Asia’s recent recovery. The negative influences that might pose a drag on growth in America and Europe — weak banks and large government deficits — are less likely to constrain Asian economies.

These economies did not suffer from the banking crisis directly. Rather, they were indirect casualties of the confidence shock that is now unwinding. Asian governments have also built up strong public finances over the past decade, which puts them in a good position to use fiscal policies to support demand, with China leading the way. Many Asian economies also have strong supply-side fundamentals that are supportive of growth — large supplies of labour, flexible economies and considerable potential to catch up with productivity levels in richer countries.

Forecasters are generally expecting the Asian economies to power ahead next year (see chart above on right). The prospects for global recovery depend on whether Asia can become a true engine of global growth, not simply by meeting demand originating in America and Europe but propelled by consumer spending and investment in this key region that is home to 60% of the world’s population.

Against this background, it is possible to envisage two scenarios for the world economy, which will in turn affect the British economy. In the first, the recovery in confidence from the shocks last autumn is not sustained and growth in America and the leading European economies is held back by the weakness of the financial sector. And because Asian economies are looking to export markets for growth, they are not able to provide an alternative engine for the world economy. In this scenario, growth is likely to disappoint at home and abroad. UK inflation will tend to remain below target, justifying a prolonged period of loose monetary policy.

However, recent growth trds in Asia also raise the prospect of a second scenario in which the recovery from the confidence shock to the global economy creates a stronger and more sustained momentum of growth. Recovery in some over-indebted economies — notably America — may be subdued by the legacy of the financial crisis. But consumption and investment in economies less directly affected by these problems — notably China, India and other Asian economies — provide an alternative engine of demand that can get the global economy moving.

In this scenario, global growth prospects would be more positive, though we risk a return to some of the price pressures we experienced in the mid-2000s. The resilience of the oil price, picking up from $40 early this year to about $70 on just a few glimmers of recovery, is a reminder of this risk. With stronger growth and more inflationary impetus, monetary authorities would need to tighten policy more quickly.

At this stage, it is not possible to predict with any certainty which scenario will unfold. Hence the wide fan charts around the forecasts in the latest Inflation Report. But as we go through the next couple of years, it will be clearer which economic world we are in, and monetary policy in Britain and around the world will need to respond accordingly.

• Andrew Sentance is a member of the Bank of England’s Monetary Policy Committee

From The Sunday Times, August 16 2009

Catching up with developments this week, the three key events as far as the UK economy is concerned were the Bank of England's inflation report, the labour market statistics and eurozone second quarter GDP data. The first two were more or less in line with predictions, the third contained the really big surprise.

The Bank's inflation report, here, was notable for a robust defence of the decision to extend quantitative easing by £50 billion to £175 billion, but also for being less dovish than the markets had expected. Certainly reports beforehand that the Bank was scared stiff of deflation were wide of the mark. It expects growth to start from here but, unsurprisingly, for that growth to be weak (though it revised up its forecast for next year). If rates remain as low as now and QE is confined to £175 billion, inflation will gradually rise to the 2% target.

Given that this prospect is not too bad, why the downbeat tone from Mervyn King? He is still smarting, I think, from being accused of missing the recession entirely this time last year. Once bitten, twice shy.

The unemployment figures, meanwhile, were pretty much in line with my expectations; a 220,000 rise to 7.8% of the workforce (2.44 million) in the Labour Force Survey measure of unemployment and a 24,900 increase to 1.58 million in the claimant count in July. Though there is a gap in levels of unemployment between the two series (because many are ineligible for benefit), the trends are similar. The key is that the LFS measures average unemployment over a thre-month period, while the claimant count is a spot measure. If recent patterns persists, the next LFS increase should be under 200,000. More here.

The big surprise, as noted, was in Europe, with both France and Germany reporting 0.3% growth in the second quarter (as did Portugal and Greece) and the eurozone as a whole a decline of only 0.1%. This is in direct contradiction to the purchasing managers' surveys, which have suggested the UK is pulling out of recession sooner than the rest of Europe. Maybe the Office for National Statistics should be set to work on the European numbers. The Eurostat release is here.

Most people were lined up for a continued pause in quantitative easing by the Bank of England. Instead the monetary policy committee (MPC) chose to increase it by another £50 billion to £175 billion, above the previous £150 billion limit, making two surprises in two months.

This may be the key to it: "Underlying broad money growth has picked up since the end of last year but remains weak. And though there are signs that credit conditions may have started to ease, lending to business has fallen and spreads on bank loans remain elevated."

The full statement is here.

For all the sniping at the government's car scrappage scheme, both inside and outside the industry, it appears to have had the desired effect, alongside rising confidence. New car sales in July were up by 2.4% on a year earlier, their first rise for 15 months, with private sales up by more than 33%. More here.

A string of good figures have boosted hopes of an early UK recovery, with the purchasing managers' index for the service sector rising to 53.2, its highest since February 2008 and the third reading in a row above the 50 break-even level between expansion and contraction.

Also out, figures for industrial production for June, which showed monthly rises of 0.5% for both manufacturing and overall industrial output, following disappointing May figures. Production fell in the second quarter but at a markedly slower rate. More details here.

Finally, Halifax said house prices rose by 1.1% in July. The three-monthly price drop in comparison with a year earlier is now 12.1%, while for July alone the fall is now under 10%. Prices have fallen by less than 1% so far this year. More here.

The relationship between the purchasing managers' surveys and official data has been unpredictable in recent months but on the face of it the latest purchasing managers' index for manufacturing is very good news. It rose above 50 in July, indicating the sector is expanding again, with gains across most components of the index. The rise from 47.4 to 50.8 was significantly better than expected. If manufacturing is growing again, that bodes well for other sectors and for the wider economy. More details here.

The Nationwide building society said house prices have risen by 1.3% this month, their third monthly increase in a row. Prices have increased by 4.4% since their recent low in February on a seasonally adjusted basis, 7.5% when unadjusted. These figures go beyond merely confirming that prices have stabilised and Nationwide suggests 2009 could see prices end up higher than they started it.

As during the period when prices were falling, movements are exaggerated by the thinness in the market, and it makes sense not to read too much into the rises of recent months. Even so, it suggests that in terms of both activity and prices, 2008 saw most of the housing correction. More from the Nationwide here.

The good news about the second quarter gross domestic product figures was that the quarterly fall, 0.8%, was only a third of that in the first quarter. The bad news was that it was twice what analysts expected. Some even hoped for a positive surprise, a flat or even a slight rise in GDP.

Something has broken down in the relationship between the GDP numbers and the surveys. The normally reliable National Institute, which bases its monthly GDP calculations on available public information, expected a drop of only 0.4%. The Office for National Statistics is consistently coming up with gloomier GDP data than other evidence would have suggested.

More details here of a broad-based decline in second quarter output.

Retail sales have held up much better in this recession than many expected, as a result of the boost to disposable income from lower energy prices and mortgage rate cuts, aggressive discounting and the much-maligned VAT cut. June was no exception, sales volume rising by 1.2% on the month and 2.9% on a year earlier. In the latest three months they were up by 0.7%.

Retailers won't necessarily be celebrating. The retail sales deflator was down by 0.2% year-on-year, showing a squeeze on prices. Household goods stores are having a torrid time. Even so, the overall numbers were quite strong. More details here.

Many in the markets think that the Bank of England's programme of quantitative easing has come to an end, while others believe there is further to go. The monetary policy committee's July minutes, for the meeting in which it decided to leave the QE target unchanged at £125 billion, failed to clarify things either way. On balance, though, the Bank was more upbeat on economic activity and also believed near-term inflation would be slightly higher than it expected, both of which argue for caution on further QE.

The decision to delay any decision on additional QE until the August meeting was unanimous, as it appears was the discussion. The minutes made this interesting point: It was important to recognise that the degree of monetary stimulus associated with the asset purchase programme was determined by the stock of the assets purchased rather than by the flow of purchases. Decisions on the appropriate degree of monetary stimulus would depend on the outlook for nominal
demand and inflation." The minutes are here.

Maybe we are just getting used to very bad numbers but there was slight sense of relief that the June figures for the public finances were not even worse; they came out marginally better than expected. These things are relative, of course, there was a current budget deficit of £9.9 billion last month, compared with £5.8 billion a year earlier, and net borrowing of £13 billion, up from £7.5 billion. Public sector net debt has risen to 56.6% of gross domestic product and the old 40% ceiling seems like a distant memory. More here.

The latest labour market statistics had something for everybody. Green shoots watchers will have taken encouragement from the small rise in the claimant count, up just 23,800 in June to 1.56m, its smallest monthly rise since May 2008.

A much gloomier view, however, was provided by the Labour Force Survey, which showed a record 281,000 rise in unemployment to 2.38 million, or 7.6% of the workforce, in the three months to May. This was consistent with LFS data showing a 269,000 drop in employment over the period. Average earnings growth, meanwhile, slipped, to 2.3% including bonuses and 2.6% excluding them.

So what's happening? It is possible that the nature of this recession means a large number of unemployed people are not claiming benefit, though the discrepancy between the two sets of data looks too large for that. It is possible too that the LFS, which is less timely, also provides more of a lagging indicator of job market activity. So it is still mainly reflecting the bad winter, rather than more recent signs of economic improvement.

In the end, despite the government's preference for the LFS measure, it is a survey (of 60,000 households), and thus subject to the usual uncertainties of surveys. The significance of the latest numbers, however, is that they suggest employment has finally taken a big hit. More details here.

There was just a danger that the Bank of England's decision to pause with its quantitative easing programme might have been prompted by a bad inflation reading but that was not the case. Consumer price inflation dropped from 2.2% to 1.8%, the first time it has been below target since September 2007, and it will drop further. Retail price inflation was negative by 1.6%, from 1.1%. More details here.

Meanwhile, the official measure of house prices from the DCLG slipped by just 0.1% in May, consistent with the stabilisation in prices on other measures, including the overnight RICS survey.

If we didn’t know it before last week, we surely do now. The economic policy landscape has changed. People will have different views on the period before the summer of 2007 - the longest run of non-inflationary growth in the modern era - but we are not going back there, at least in terms of policy.

Then, monetary policy was all about small changes in interest rates, a quarter-point at a time up or down for Bank rate, and those small changes had big effects.

Now, as we saw on Thursday, the big monetary policy decision was not on interest rates but whether the Bank of England’s monetary policy committee (MPC) would extend its £125 billion programme of asset purchases, so-called quantitative easing.

As I touched on here last week, the debate was whether to do it now or delay for a fuller discussion in August, when new economic projections will be available.

The MPC chose to delay, which does not necessarily mean this unconventional policy is over but does point to the beginning of a wind-down, consistent with evidence that the economy has stabilised.

On fiscal policy - tax and spending - we have moved from what was supposed to be a rules-based approach; meeting the “golden” and “sustainable investment” rules. Those rules: only borrow to invest over the cycle and keep public sector debt below 40% of gross domestic product were creaking long before the financial crisis, particularly the golden rule.

Now they have been replaced with a much more simple rule - get borrowing down from its current crisis level of 12.4% of GDP, £175 billion. All those debates about where we were in the economic cycle, so important when we had a golden rule, are now irrelevant for fiscal policy, though they may have an important role elsewhere, which I will come on to.

How easy will it be to pursue this new and very simple fiscal rule? The political fog may lift during the party conference season though we may have to wait longer.

Alistair Darling appeared to suggest last weekend he would be looking at a freeze on public sector pay but quickly “clarified” his remarks. David Cameron ran a mile when asked whether he would freeze the pay of public sector workers. The votes of 6m public sector workers are too important to trifle with, it appears.

The Tory leader’s promised “bonfire of the quangos” was a damp squib, even before the mid-week rains. If we are to have the biggest cuts in departmental spending in at least a generation, and possibly since the Geddes axe of the 1920s, both main parties are tiptoeing towards them.

Public sector median full-time earnings are £523 a week, against £460 for the private sector. But suggestions pay should be frozen have produced a near-hysteriacl response. The argument for restraint is well put by John Philpott, chief economist at the Chartered Institute of Personnel and Development.

One way or another the public sector’s £158 billion salary bill has to be frozen or reduced. The more public sector workers resist pay freezes, let alone reductions, the more than burden will fall on jobs.

Perhaps the biggest change in economic policy of all, however, arises from last week’s regulatory white paper from Darling, and the response to it from George Osborne, his Tory shadow, which opened up the clearest blue water between the parties we have so far seen.

The Tories have moved a long way on the Bank. The party opposed independence in 1997; now it wants to make Mervyn King the most powerful governor in 315 years of Bank history, with control over both monetary policy and banking supervision. Though he is no doubt flattered, my sense is that he feels it is probably a bit too much.

Darling would leave supervision with the Financial Services Authority and beef up the tripartite system with a new Council for Financial Stability (CFS) consisting of the Bank, Treasury and FSA holding regular meetings and publishing minutes.

Either way, this will represent a new era, or perhaps a revised version of a very old era. In the old days, and I am only talking about the 1950s, 1960s and 1970s, controlling the banking system was an important part of macroeconomic policy. Policy instruments with exotic names like the supplementary special deposits scheme, the banking corset, were used.

They disappeared as a result of a genuine bonfire by an earlier Tory leader, Margaret Thatcher. Once exchange controls were abolished in 1979, most direct and indirect limits on bank lending went too. Operating monetary policy solely through interest rates may appear to have been around forever but it has not.

Financial stability policies will from now on have an important macro component. After all, part of the new framework will be what is known in the jargon as macroprudential regulation.

Somebody, the Bank if it get the powers from the Tories, the CFS in the case of Darling’s proposals, will have to make decisions on where the economy is in the cycle, and whether there is a danger of overheating in economic growth and asset prices. The banks would be forced to rein in lending by a counter-cyclical tightening of capital requirements and possibly other measures in addition. Used properly it could be as powerful a tool as interest rates.

It could also dampen the need for big interest rate changes. The more the strain is being taken up by other instruments, the less the work for interest rates. It goes without saying that it would be an odd set of circumstances if the Bank was simultaneously tightening capital and reserve requirements and cutting interest rates.

But it will increase the need for accurate economic assessments. Reversing interest rates changes is easy and quick enough. Changing bank capital and reserve requirements will be much more cumbersome.

All this is some way down the road. For the moment, the challenge is to get enough lending into the economy. Though the Bank has introduced uncertainty into its future intentions on QE, so far a big expansion of its balance sheet has not led to an acceleration of lending. The luxury of deciding what to do about excessive lending will come later, possibly much later.

But it is a new era. There is only one direction for fiscal policy. Monetary policy and financial stability policy will become closely intertwined. We used to think it was simple. It isn’t now.

PS: The credit crunch has been dreadful for many businesses but has provided a mini boom for publishers. Amazon has at least 50 credit crunch books listed. In some cases the connection is tenuous but its list is by no means exhaustive.

So plenty of summer reading material and it is a sobering thought that books will be appearing on this crisis for years. J K Galbraith’s The Great Crash has been selling well since first published in the mid-1950s. Ben Bernanke’s collection of essays on the Great Depression came out in 2000. It’s an ill wind.

From The Sunday Times. July 12 2009

Factory gate prices for manufactured products were 1.2% lower last month than a year earlier, while input prices were down a significant 11%. The figures largely reflect an unwinding of last year's big increases in energy and commodity prices but show that the debate over deflation is not yet over. More here. The FT-Acadametrics house price index slipped by 0.3% last month, consistent with recent evidence that prices may be stabilising.

The Bank of England's monetary policy committee (MPC) left Bank rate unchanged at 0.5% but deferred a decision on whether to extend the quantitative easing programme beyond the existing £125 billion until next month. It was always going to be a close-run thing about whether they would go now for more QE or wait. It will, however, raise questions about whether the policy has now come to an end.

This is its 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 totalling £125 billion financed by the issuance of central bank reserves.

"The Committee expects that the announced programme will take another month to complete. The Committee will review the scale of the programme again at its August meeting, alongside its latest inflation projections."

Waiting for the trade deficit to narrow in response to sterling's devaluation has required patience and this may be a false dawn but the May numbers, admittedly helped by oil, were better, with a deficit in goods and services of £2.2 billion, compared with £3 billion in April. The Office for National Statistics believes the trend is for a gradual narrowing. More here.

The Halifax said house prices slipped by 0.5% last month, following May's 2.6% jump. It says the pace of decline is slowing and the average price in June, £157,713, was marginally higher than in March, £157,320. The quarter-on-quarter decline, 1.9%, was the smallest since Q1 2008.

Meanwhile, Nationwide's consumer confidence index rose by four points to 58 in June and more people expect the economy to get better over the next six months than get worse. The release is here.

After the last set of industrial production figures the National Institute of Economic and Social Research called the end of the recession in March. Now it appears that reports of its death were exaggerated, though the pace of decline is clearly slowing.

Manufacturing output fell by 0.5% between April and May while total industrial production dropped by 0.6%. The latest three-month falls for the two series were 1.2% and 1.8% respectively; some way away from stabilising. More details here.

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 pheno