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 phenomenon, but that is of small comfort. More details here.

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

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

Here is the Bank's statement:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This is its statement:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

From The Sunday Times, December 7 2008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here is the Bank's statement:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

My commentary for Times Online:

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

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

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

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

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

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

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

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

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

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

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

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

This is from the FT:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

WISHFUL THINKING

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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