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If it's not keeping global policy makers awake at night, it should be. Around the world, governments have fallen over themselves to support the global economy in the past year.

That may well have prevented another great depression. But what if they all turn off the taps at the same time?

Whether it was interest rate cuts or ballooning budget deficits, the world has never received so much emergency medicine in so short a time. And if the likes of the IMF are right, the treatment is starting to work (see my recent post, Decoupling Redux?).

Global output may already be growing again, and it looks as though we will see positive growth in most economies next year.

Understandably, the debate is now turning to "exit strategies": not just for central banks but also - and especially - finance ministries.

Here in the UK, the government's own budget plans involve a sharp fiscal tightening from the middle of next year. The NIESR reckons the public sector could subtract well over 1.5% of GDP from economic growth in 2011 alone.

As we are already seeing, political debate up to - and beyond - the general election is likely to centre around how that tightening will be achieved - and whether it's enough.

With no general election next year, the debate is less heated in the US, but fretting over the scale of the budget deficit is crippling President Obama's efforts to reform the health care system.

Six months ago, polls showed that voters were much more concerned about the health system than the deficit. Now the opposite is true.

In Germany, the budget deficit will be about half the size of America or Britain's next year -around 6% of GDP, but many Germans consider it downright unconstitutional (in fact, if a proposed constitutional amendment gets passed, it could be.)

In the run-up to this autumn's election, senior finance officials are already talking about cutting borrowing as soon as possible.

None of this is surprising - or unwelcome, if viewed solely from a national standpoint. Here in the UK, budget deficits of more than 10% of GDP are clearly not sustainable for very long.

Yes, as the prime minister keeps reminding us, we came into this with a relatively low level of public debt as a share of GDP. But with a falling denominator (GDP) and fast-rising numerator (the stock of debt) - you'll be amazed how quickly we can catch up.

But - and this is where the PM did have a point in the lead-up to the G20 Summit in April - there is a global collective action problem in all this. What makes sense for each every individual economy may spell trouble with the world as a whole.

This is especially true when it comes to fiscal stimulus plans, because the country that implements such policies will pay all of the cost but reap only part of the benefit. Some of the extra demand generated will be spent on imports and flow overseas.

New research by economists James Feyrer and Jay Shambaugh (NBER Working Paper 15113 - ) shows how great these spillovers can be, particularly for a large open economy like the US. Other things equal, they find that half of the impact of a change in US fiscal policy will flow overseas.

This issue was much talked about by the likes of Gordon Brown and President Obama's advisor, Larry Summers, in the immediate response to the crisis. But at least when the economy is going downhill, it's in a nation's self-interest to stimulate, even if they know some of that will leak abroad.

When the economy is starting to recover, the incentive goes the other way. It pays to tighten first, while you can still enjoy the benefits of loose policies elsewhere.

The risk is that everyone will rush to tighten in 2011 - indeed, that is what many countries already plan to do. And the great sucking sound that you hear will be the draining away of global demand.

Does this mean that governments can or should prop up global demand indefinitely? Clearly not. But the next few years will require some careful policy coordination - domestically as well as internationally.

On the domestic front, there's no reason why monetary policy has to tighten at the same time as fiscal. In fact, it would be highly beneficial if it didn't.

As I have mentioned before, the collective action problem, for monetary policy, works in reverse: the countries that raise interest rates (or halt quantitative easing) first could well find their currencies get pushed up, which would hurt the economy by cutting demand for domestically made goods. That would be particularly unwelcome in the UK, which needs to export a lot more in the coming years and import less.

It would also be better for the economy if long-term interest rates could stay low to "crowd in" private investment and demand. Other things equal, the faster that public borrowing goes down, the longer the Bank can hold off tightening, and the less likely it is that long-term interest rates (government bond yields) will rise to choke off private demand. So, properly managed, tighter fiscal policy could be neutral from the standpoint of overall demand.

But all of this assumes that our exporters have someone to sell to, and that globally, the reverse of all those fiscal stimulus packages coincides with the return of private sector demand.

As the , right now that's a pretty hopeful assumption. There's little evidence yet that the private sector will be able to pick up the baton of global demand - especially while countries like Germany and China still seem attached to importing private sector demand, through exports, rather than generating it for themselves. (If you'll forgive me for raising this issue yet again).

If we all run for the same exit - at the same time - the global economy is in for a bumpy ride.

It turns out the UK economy has moved a lot more slowly in the past few months than the surrounding debate. 'Twas ever thus.

If is right, Britain's national output is still shrinking. And not by a little.

If this were the US, where GDP figures are presented on an annualised basis, we'd be talking about the economy declining at a rate of more than 3.2% in the second quarter. Perhaps it's just as well that we're not. But however you dice it, the 5.6% decline in GDP in 12 months is the worst since these records began in 1955.

Two points of perspective: first, though the 0.8% estimate is clearly at the very low end of independent forecasts, the sheer range of those forecasts in the lead-up to this announcement show quite how hard it is to call the economy right now. Some thought it would be even worse than this. Others were actually expecting a 0.4% rise.

The second point is that, as ever, this number is subject to revision. In the crucial service sector, the ONS only has actual figures up to May. The rest is largely estimated. Coverage of the production sector is better, but even there, the hard numbers often only extend to May.

If we thought the economy was gaining momentum over the course of the past three months, you might expect the figures to be revised up when the second set of figures for the second quarter come out on 28 August. (Or much later - remember it takes up to two years from the end of the quarter for the ONS to get all of the data it needs for the final GDP figure).

Research by economists at Goldman Sachs [see chart below from 09/18 May 14, 2009] has found that later revisions to British GDP numbers are biased upwards - in other words, the ONS seems to err on the side of the under-estimating GDP rather than over-estimating it. They found the same to be true for the Eurozone economies. Whereas American GDP data tends, on average, to get revised down. More proof, perhaps, of Americans' greater optimism - or greater affinity for spin.

But it should be said, this research didn't go back far enough to cover GDP estimates during a recession (they didn't think it was worth it, given that they now measure GDP so differently). The revisions when GDP is falling could easily go the other way.

There's no getting round the fact that I said all of this when the first estimate for growth in the first quarter came out. And yes, the figures were revised. But not exactly in the direction the optimists expected. As you'll recall, the number went from minus 1.9 to minus 2.4.

Also, if we think back, the greatest talk of "green shoots" was actually in the first part of the quarter - April and May. If anything, the data for June has gone the other way (notwithstanding yesterday's strong retail sales figures for June).

Where does this news fit into the big picture? I would say that anyone who was worried about the momentum of the recovery before will be that much more concerned now. Not least, because the recovery has yet to actually show its face. With a modest, 0.2-0.3 % decline in the second quarter, you could say that a third quarter recovery was still on track. It could still happen. But the story is a lot harder to spin.

As I said yesterday, the MPC will be looking far beyond the here and now when it makes its decision on quantitative easing next month. Looking back at the May Inflation Report, the MPC appears to have been expecting GDP to fall by 2.9% in the first half of the year. If this figure is right, the decline will instead be 3.2%.

That's not a huge difference. But you'd have to say that this makes a continuation of the policy a little more likely, albeit in a more subdued form. As economists at Barclays Capital have pointed out, senior Bank officials - including one of the deputy governors, Charlie Bean - are on record saying the MPC was expecting a "small" contraction in the second quarter. This isn't small.

And, of course, it makes it that much less likely that the Treasury will hit its forecast for 2009 of a 3.5% decline overall. From where we are now, you would need growth of maybe 1.5% or more in both of the second quarters to make the numbers add up.

The forecasts for the public finances are pegged to a slightly more conservative forecast of a decline on 3.75%. But I'm reliably informed that in preparing the Budget in April, the Treasury civil servants wanted a gloomier forecast, to allow for the possibility of a 2% decline in GDP in the first quarter (they got that initial first quarter estimate, hours after the chancellor sat down).

No 10 had a different view, and in the end, the forecast was for a decline of 3.25-3.75% this year. For a while it looked as though the data were moving the prime minister's way. Not any more.

Update, 27 July: An earlier version of this post mistakenly said the service sector data extended only to April, not May, for which apologies.

It's how big it is, not what you do with it. At least, that's the view of Britain's central bank.

I'm tempted to leave it there. But I suppose a little explanation might be needed.

You'll remember a couple of weeks ago I wrote about whether the Bank would continue its policy of quantitative easing. Back then, I said the answer might partly depend on whether you thought it was the quantity of new money created that mattered, or the process of injecting it into the economy.

If QE is a "topping up" exercise to bring nominal GDP - and the amount of money flowing the economy - back to normal levels, then what matters for the policy is how much you've put in.

If, on the other hand, you think of QE as an ongoing stimulus, you might be less interested in the size of the injection than in how it's being injected - and how long for.

You will find supporters of QE in both camps. But the minutes of last month's MPC meeting, published today, suggest that the Bank's policy-makers had a very clear view:

"The key question for the committee at the current meeting was whether it needed to make an immediate change to the total of planned asset purchases. 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."

So, size matters. QE is about how much money you inject into the economy - and how many assets you buy for that money - not how long you spend it for.

Does this help us establish whether the MPC will stop QE when it meets next month? Well, yes and no.

It does tell us that the best place to look for clues to that decision will be the Bank's expected path for cash GDP in the next year or two, not short-term developments in the asset markets.

On the basis of this statement, for example, I don't think we should expect the Bank of England to extend QE, simply to prevent further increases in long-term borrowing rates (notably the government's). If gilt yields rise, the MPC won't necessarily consider that a good reason to carry on.

To repeat and (grossly) oversimplify, if you think it's about quantities, that x amount of money is needed to get cash GDP back to normal levels, then once you've put x into the economy you should be unconcerned about what happens to bond yields after that. What matters is that the money is filtering its way through the economy.

That might lead you to conclude that the MPC is likely to give QE a rest in August. Or, as I suggested in that earlier post, to ease the markets' pain, it might say it will spend the last £25bn authorised by the chancellor, though more slowly than before.

Could it possibly be that simple? I suspect you know the answer. Because in this limpid description of the Bank's view of QE, I have left a small detail out.

Even if the MPC can agree that QE is about the quantity of money created - they don't actually have a clue what the right quantity is.

As senior figures at the Bank said at the time, the £150bn figure that was authorised by the chancellor when the policy began bore some relation to the shortfall in the broad money supply that the MPC was hoping to make up. But no-one knew how much they would actually need.

The Bank's critics - including Martin Weale at the NIESR, as it happens - have said that it has taken an overly mechanical, "monetarist" approach to QE in focussing only on the amount.

He and others would support a more Keynesian approach, intervening directly to support corporate debt markets, looking more at the direct effect on private lending rates than on how much money has gone in. As I noted last week, the IMF Board seems to agree.

On the basis of the minutes released today, this question was not even discussed in the July policy meeting. The debate was all about the scale of the asset purchases under QE, not the nature of the assets purchased or the way it is done.

Regardless of whether they opt to continue with QE next month, in putting quantity before quality some critics will say they have already made the wrong choice.

It may not have seemed like much at the time, but if the are right in their , the first three months of 2008 will mark the high point for British living standards for some time to come.

After possibly the steepest recession since the 1920s, this respected think-tank now says it could take six years for income per head in the UK to get back to where it was early last year, before the recession began. (To be precise, they think it could take until the first quarter of 2014 for Gross Domestic Product [GDP] per capita to return to the level it reached in the first quarter of 2008.)

The has said that the was the steepest since 1958, when output fell 2.6%. But the NIESR's director, Martin Weale, thinks that if you measured the 1958 data the same way we measure it now, that first quarter fall would be "probably the worst quarterly economic performance since the 1926 General Strike."

The forecast is for a 4.3% fall in GDP 2009, with growth of 1% in 2010 and 1.8% in 2011 - the year when the Treasury forecasts growth of 3.5%. These forecasts are not much changed from April, though the institute is now gloomier about the pace of recovery between 2010 and 2012.

If all of this is right, GDP overall will not return to the level reached in first quarter of 2008 until autumn of 2012 - after the Olympics. It will take longer - 6 years - for GDP per head to get back to its peak because of our rising population. (Of course, it will take less time for GDP per head to catch up if, say, more Eastern Europeans go home than the government currently expects. The authors think that is quite possible).

The institute is not just gloomier than the government about the pace of the recovery after 2010 - it also thinks tax revenues for a given rate of economic growth will be lower than the predicts. That has some stark implications for the public finances, and for any future government.

According to Ray Barrell, one of the report's authors, the Treasury is expecting tax revenues from housing, for example, by 2013 to be back to the level seen in 2004. Only in 2004, we were in the middle of a great house price boom. Hmm.

With what it considers a more realistic view of the likely path for taxes and growth, the NIESR thinks that in 2013/4 the government would still have a deficit of £160bn pounds if it sticks to the nominal spending and tax plans it laid down in the budget, not the £97bn forecast in the Budget.

In other words, on unchanged policy, the NIESR thinks the government would be borrowing £60bn more in 2013-14 than it currently expects.

Then again, how likely is it that policy will remain unchanged? Not very. In practice, the chance are that the spending plans will be somewhat tighter, and borrowing somewhat lower. Though the NIESR still thinks the deficit will be more than £120bn by 2013-14, or 7.5% of GDP.

Of course, these are just forecasts. They come with usual health warnings attached - nothing is likely to go quite as the NIESR expects. But they are by no means outlandish. Many other independent forecasters are much gloomier.

Is there any good news in this report? Well, the NIESR economists do at least agree that employers are shedding labour less quickly than past experience - especially the early 90s - might have led us to expect.

But you can hold off on the champagne: they still expect unemployment to carry on rising for at least a couple of years, peaking at 9.3% of the workforce in the middle of 2011.

And when, you might well ask, will unemployment be back to where it was in those halcyon days of early 2008? I'm afraid the answer appears to be 'approximately never'.

In their "long-term projections" the NIESR forecasts an average unemployment rate of 6.8% between 2013 and 2017. Back in March 2008, unemployment stood at 5.3%. Estelle was number one, with American Boy - and the Queen was just about to open Terminal 5 at Heathrow. We didn't know how lucky we were.

How much is it all going to cost? It's a question we've all been asking since the financial crisis began. And if you've found it hard to keep track of the money being shovelled out the door to protect our financial system, it turns out that the Treasury has as well.

At the end of last year, events were moving so fast that the Treasury didn't have time to get Parliament to formally underwrite its £500bn-plus Asset Protection Scheme for two of Britain's biggest banks. It had to get retrospective approval, weeks later, after the deal was announced.

As a result, the Treasury spent £24bn more than it was authorised to spend in 2008-9, which today led the National Audit Office to qualify the Treasury's accounts for the first time since 1999-2000.

But the head of the National Audit Office hasn't given the Treasury much of a telling off. Amyas Morse accepted that "the pressure for the department to intervene... gave it no time to seek from Parliament the additional resources needed".

The new news in the Treasury's accounts was the Treasury's £25bn estimate of the likely cost of the Asset Protection Scheme, which Lloyds and RBS have used to insure £585bn worth of assets.

How did it reach this figure? We aren't told. All they will say in the is that we shouldn't pay much attention to it:

"This is therefore a highly provisional loss estimate for the scheme, based on preliminary analysis of a sample of assets initially proposed to be included in the scheme, and the APS term sheet originally agreed in March 2009. It should therefore be viewed with considerable caution. The estimate could be subject to substantial revision (up or down) as further due diligence reports are completed and as the terms of the APS are finalised. Altered economic and market conditions would clearly also affect estimated losses. We are unable to take a view on the expected timing of transfer of any economic benefit."

So they think that it could cost £25bn, but as blunter observers might put it, they haven't really got a clue.

And where does that £25bn fit into the general scheme of things? Sorry - wading through these numbers is a tortuous business, but where these kinds of numbers are concerned, I think it's worth it.

As we know, the financial sector bailouts - and the fact that RBS, Bradford & Bingley, Lloyds Banking Group and Northern Rock are all now considered to be part of the public sector - has caused our public debt to explode. The ONS reckons that adding all of these banks' liabilities to the public sector will raise the national debt by £1-£1.5tn, or 70-100% of GDP.

But, as we also know, that doesn't mean very much, because it leaves out so much, on the negative and the plus side of the ledger.

On the plus side, these institutions have assets that are (theoretically) worth as much as their liabilities, but they are largely excluded from the figures. Unless the value of the UK housing stock turns out to be zero, you can be pretty sure that the taxpayers' intervention in these banks will not cost anything like that much. It's possible that the taxpayer will actually make money when the government sells its stakes off. (For the latest thinking on this, see Robert Peston's post last week).

But the rise in public sector net debt as a result of the support for the financial sector excludes some big negatives as well - most notably the cost of the various guarantees that the government has offered to banks and others to help them through the crunch.

In the Budget, the Treasury said that all the support for the financial sector had cost £84bn upfront in 2008-9 and was expected to cost another £38bn in 2009-10 (mostly due to further cash injections for Northern Rock, Bradford & Bingley and RBS).

But the Treasury thinks we will get a lot of that money back. The estimate for "unrealised future losses" on financial sector interventions was £20-50bn, or 1.5-3.5% of GDP. That's at the very low end of forecasts. The IMF reckons that it will cost about 9% of GDP - more than the average for the G20 but less than the US (see my post of 9 March).

Go back to that new £25bn figure. The Treasury says that this figure was incorporated in that overall forecast for unrealised losses. If so, that suggests that the Treasury, for now at least, thinks the last (or we hope it is the last) of their many interventions to support the banking sector could prove the most expensive. Insuring "toxic" assets for RBS and Lloyds would account for at least half of the total costs of all of this support - and might account for even more.

I say "might". Of course the £20-50bn estimate is just as speculative as the £25bn. No-one knows how much any of this will end up costing. Without more information on how the Treasury reached its estimates, we can't even assess whether the Treasury is making a reasonable stab.

The year 2008-9 could go down as the year when the Treasury spent £25bn more than it technically had, on helping out two of Britain's largest banks. But who knows? It might not have spent anything at all. Either way, it could be years before any of us has a clue.

Has this global crisis shown that economics is a load of rubbish? If you think the answer is "yes", you might be interested to hear that the Economist magazine - that bastion of free market economics - agrees with you.

Okay, so I'm exaggerating. It doesn't think economics is ready for the bin. But in a , the magazine says the profession has a lot of lessons to learn - and humble pie to eat - as a result of the past few years.

Some in the profession have come out better than others, either because they warned early of trouble ahead (the likes of Nouriel Roubini, Avinash Persaud, and several economists at the Bank of International Settlements), or because they were working far from the scene of the crime - people like the behavioural economist, Richard Thaler, the co-author of .

But crucial parts of the dismal science have come out of all this, well, pretty dismally - notably macroeconomics and the financial economics.

As the Economist notes, the criticisms levelled against macro and financial economists are:

"[T]hat they helped cause the crisis, that they failed to spot it, and that they have no idea how to fix it."

That's a pretty comprehensive charge sheet. And none is entirely wrong.

In their different ways, both the macroeconomists beavering away at the major central banks and the financial economists in academia and Wall Street took for granted a certain kind of market efficiency which simply didn't hold.

In the case of the macro-economists, famously, the assumption by the Federal Reserve and others was that asset price bubbles could take care of themselves - and even if they didn't, it would be less costly to let them run their course and clean up afterwards than to try to take the air out on the way up. Oops.

Macroeconomists in academia also tended to assume away the financial sector in their models of the economy.

They thought very hard about imperfections in the product and labour markets - imperfections which might cause unemployment, inflation, or both. These, after all, had been the macro concerns of the 1960s and 1970s.

But when it came to the financial market - perfection was the order of the day. Markets always cleared. All information was built into current prices. And all markets were always liquid. In other words, if things got tough you could always sell your troublesome assets to somebody else.

I'm not being entirely fair. There were exceptions. But it's striking how little the profession prepared its students for any of the big issues we face today.

I remember, while studying graduate macroeconomics at Harvard in the mid-'90s, asking a question relating a certain piece of theory to a recent decision by the Federal Reserve. It was like I'd said a bad word.

Introducing real world policy issues to the discussion was considered to be in bad taste. And I should say, this was a class about monetary policy.

And if monetary economics was too abstract, at least there was plenty of it. After the disasters of the 1970s, economists came to an agreement that fiscal policy was more or less useless for short-term management of the economy. So they basically stopped thinking about it and left it to the political scientists.

Paul Krugman reckons that of the 7,000 or so papers published by the National Bureau of Economic Research in Boston between 1985 and 2000, only five mentioned fiscal policy in their title or abstract.

The NBER is responsible for dating US recessions and is the central clearing house for macroeconomic research in the US.

As it turns out, a few more papers on fiscal policy would have come in handy in the past year, as policy-makers gradually came round to the view that fiscal policy was the only economic lever left to pull.

I won't go into the detailed case against financial economics, and the debate over whether economics can really be blamed for rise and fall of credit derivatives, the subprime disaster and the other financial market messes of the past few years.

If you want to read more on the interplay between theory and practice in this area, I would point you in the direction of - or better, perhaps, in the London Review of Books.

(His book, , published before the crunch, provides a more academic but hugely readable survey of the topic for those that want to get in deeper.)

the day of the run on Northern Rock.

At the most basic level, the defence of the high theorists is that their models were only as good as the data that went into them - too many practitioners on Wall Street decided that 20 years' worth of data was enough to tell you that house prices could never fall, and stock prices would never go down by more than 5%.

But they can't get off entirely. For one thing, they also assumed that markets were always liquid. Which of course they were, right up until they suddenly weren't, and all those banks and other institutions were stuck with impossible-to-value assets which were equally impossible to sell.

Also, and related, these models assumed that assets - and the risks attached to them - could be valued on their own, without reference to all the other people in the market holding those assets. They didn't think enough about the fact that if one model said "sell", chances are everybody else's would be saying the same thing.

So, all in all, not an edifying list of complaints. But does that mean economics is a busted flush? I'm afraid not, because even if you think economics got a lot of this stuff wrong, you'd be hard-pressed to understand - or to fix - what's happening in the global economy today without it.

Maybe it's not such a good time to be an economist. But it's one helluva time to study economics.

We knew the IMF had a gloomier view of Britain's public finances than the government. Now it turns out that the Fund's directors are gloomier about the state of the financial system as well. If they are right, it could have interesting implications for the Bank's policy of quantitative easing.

Let me handle the budget stuff first. There isn't much new in this report - unsurprisingly, since it is based largely on the staff mission to the UK, whose conclusions have already been published. But it is worth noting that the IMF's executive board has signed up to the staff's earlier, rather stark, assessment of the road ahead for the budget.

The directors agree that there will need to be "a strong commitment to reverse the sharp deterioration of the public finances once the economic recovery has been established".

Their forecasts are not strictly comparable - because they are for calendar, not fiscal, years - but they are a bit more pessimistic than the Treasury on both the size of the deficit next year and the rate at which the stock of public debt is going up.

They point out, helpfully, that "[c]redibility would be enhanced by specifying concrete expenditure and revenue measures to achieve the desired adjustment". I'm sure the government will rush to follow their advice.

But for my money, the most striking thing about the statement was the directors' pessimism about the current state of UK bank balance sheets:

"Directors stressed that the most important policy task remains repairing the financial system. Significant uncertainties remain about the adverse impact of the recession on asset quality. Substantial further write-downs would result in an erosion of capital buffers and might lead to renewed doubts about the capital adequacy of individual financial institutions. These lingering uncertainties are restraining lending growth.
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Directors suggested that the authorities should encourage banks to strengthen their capital base and explore options to improve capital structures. The authorities should also continue their contingency planning, and a number of Directors agreed that they should be prepared to provide further public capital, if needed."

The government's multi-faceted support for the banks - notably the Asset Protection Scheme, which effectively caps the potential losses from so-called "toxic" assets - is supposed to have fixed this problem, or at least much reduced it. Apparently the IMF board thinks it might not be enough.

And they're not the only ones. In its latest financial stability report, the Bank of England made clear that it was still worried that British banks might still be undercapitalised. Despite the taxpayer-funded guarantees for assets within the scheme, the report said that even "relatively modest" losses on other assets would "erode capital buffers significantly".

As Ben Broadbent of Goldman Sachs has pointed out, you can disagree with the Bank (and the IMF board) on this. In fact, Goldman Sachs' own equity analysts think that the APS will cover 75% or more of the gross losses of the two very large banks that have participated, and that the system as a whole has "ample resources" - not just to cover future losses but "fund any genuine opportunities that arise".

In other words, they don't think that a lack of capital is necessarily holding the banking system back from contributing to an economic recovery.

I'm not sure I share the Goldman Sachs analysts' optimism. But, either way, as Broadbent admits, it matters if the Bank is more gloomy about the banks.

Why? Because if you think the banks are not lending because they lack capital rather than liquidity, you might also wonder about the efficacy of providing the banks with lots of liquidity to encourage them to lend. That is a key channel through which quantitative easing might have been thought to work.

As it happens, Mervyn King has always been sceptical about this "bank lending" channel for QE (see my "QED" post). But if you think the banks will just sit on all their "extra" cash (because they don't see it as "extra" at all), then the focus has to shift to the "bond price" channel for QE - the fact that, by buying up assets, you push up the demand, and thus hopefully cut the cost of borrowing for private companies.

If this is the main focus of the Bank's policy, a number of critics have long argued that they should be buying up private assets to achieve it, not government bonds, or gilts - because gilts are too similar to cash. They are both risk-free assets. That means it's not obvious, to the critics, that having the new cash from the Bank (in exchange for the gilts they've just sold) will make them want to go out and buy up more private debt, thereby making things easier for firms. They might simply sit on the cash, just as they were previously sitting on the gilts.

As the Bank's Deputy Governor, Charlie Bean, repeated to Hugh Pym earlier this week on his "QE tour" of the UK, we don't know very much about how the policy is working - we may never know what it really achieved. But for those who have long called for the Bank to spend more of its QE cash on private assets, the IMF board has a line in this new report for them as well:

"Directors noted that diversifying the Bank of England's private asset purchases further could help improve the functioning of capital markets".

It's been a dilemma for all the major central banks in this crisis: whether to help private credit markets directly by buying private assets, at the risk of piling up private risk on the Bank's balance sheet, or rather to buy safer, public, debt instead, at the risk of being less effective and, possibly, creating the impression you are paying the government's bills.

By and large, the Federal Reserve has gone the private debt route and the Bank of England has taken the second, government debt route. It will be interesting to see whether the Bank re-thinks.

Economic news comes in shades of grey - not black and white. are a case in point.

If you're interested in hearing both sides of the story on the broader economy right now, you might like to watch Flanders vs Flanders (below). There you get two economics editors for the price of one - we're all about value for money at Stephanomics.

The 281,000 rise in the broadest measure of unemployment is a shock to analysts who were looking for about half that amount. By that measure, there are now more than 750,000 more people out of work in the UK than when the recession began last spring, and the rate of increase has been accelerating since the autumn.

Much attention has focused on the discrepancy between that large rise in the broad, ILO (International Labour Organisation) measure of joblessness and the narrower claimant count, which rose by far less than expected in June - by under 24,000.

The ONS points out that the claimant count figure is more recent. If you compare like with like, the rise in the people claiming jobseeker's allowance between March and May (the months covered by the wider measure), was 226,000*, not far off the other figure.

Should we get excited about the difference between the two figures? I suspect the answer is no.

If the relative gap between the two numbers had grown in the past year, that would suggest that a rising proportion of the unemployed were either not eligible for jobseeker's allowance or simply deciding not to claim. That, in turn, might have told you something about the kind of people that have been losing their jobs.

You can't get the means-tested jobseeker's allowance if you have savings or household income about a certain level, though there is still the contribution-based benefit if you've made enough National Insurance contributions. Even if eligible, a lot of middle class people might not bother to claim.

However, the opposite appears to be true - a year ago, about half of the unemployed were claiming jobseeker's allowance. Now the figure is nearly two-thirds.

That is not so surprising. Because, as the latest figures underline once again, this has not been a white collar recession. Since last March, employment in manufacturing has fallen by 6.7% - more than twice as much as any other sector. For comparison, there's been a 2.8% fall in the the numbers employed in "finance and business services".

The fact that the recession has hit manufacturing so hard probably explains why one other widespread prediction has not turned out to be true. Women have not so far been worse hit by this recession - or if they have, it is in ways that are not captured by official statistics.

Female employment fell by 0.8% in the year to March. The number of men in work fell by more than twice as much - 2% - in the same period. (To state the obvious, these are percentage figures, so you can't say it's because there are a smaller number of women who work.)

I'm not surprised by those figures either. After all, this is a recession concentrated on manufacturing, property, and financial services - all sectors in which men outnumber women (by three to one in the case of manufacturing).

The number of jobs in "education, health and public administration" has actually risen by 2.1 % in the past year. There, women outnumber men by more than two to one.

It's interesting to note that number of part-time jobs has risen slightly in the past year, as the number of full-time jobs has fallen. But that is an exclusively male story - there's been a 5.7% rise in the number of men in part-time work, against a slight fall in the part-time jobs for women That's consistent with this idea that firms are trying to cut costs without laying off workers.

There is one commonly held view that finds further confirmation in this new data: British-born workers have borne the brunt of this recession so far.

In the first three months of 2009, there were roughly 3.8 million people in work in the UK who were born overseas, slightly more than a year before. Over the same period, the number of British-born workers with jobs fell by 451,000. The numbers are slightly different if you separate by nationality rather than birthplace, but the story is the same.

This is a difficult and important issue which I want to look at in more detail in a future blog. Suffice to say it will be interesting to see how the mainstream politicians handle it if this tale of two labour markets continues through to the election.

*Update, 16:34: In the interests of precision, the ONS has pointed out the 226,000 figure is not strictly the rise in the claimant count between March and May; it's the rise between the three month average for December to February and the three month average for March to May.

It's finally happened.

For nine months the Bank of England has been undertaking herculean efforts to prevent deflation. For all that time the CPI has somewhat unhelpfully stayed above 2%, making a complex policy that much harder to explain.

Not any more. The CPI measure of inflation grew by 1.8% in the past year, below the target for the first time since the fall of Northern Rock.

Although the RPI measures shows a fall of 1.6%, that is almost entirely due to falling interest rates and food prices. This isn't deflation in the sense that economists worry about. And the new data don't tell us much about the probability of having that kind of deflation down the road.

As I've said before, we could still see falling prices on the CPI measure in the next year - particularly if the economy experiences some form of double-dip. But that's not what most forecasters expect. In fact, the likes of the think deflation is rather less likely here than anywhere else.

But is deflation the real enemy? I raise this after reading Adam Posen's rather forthright written submission to the Treasury Select Committee, which was published today in advance of the hearing this morning on his appointment to the MPC.

Posen has spent much of his career thinking about some of the key issues confronting central bankers today - notably deflation and bank crises. His comments are worth reading for that alone, but his view of the lessons of the Japanese experience are particularly interesting.

Once deflation had begun in Japan, he says it was a lot harder to cure than anyone expected. But it was also less harmful than many - including he - had feared.

Prices fell by about 1% a year for a long period, but there was not, in fact, a "deflationary spiral". The rate of the price declines never accelerated in a meaningful way, even when the economy remained weak, and most economic models suggested prices would start to fall by 2 or 4%.

The bottom line, he says is that economists just don't understand deflation very well:

"I think these facts call for some degree of humility. The Bank of England is right to be engaged in quantitative easing to address our current problem. But I think we should stay away from very mechanistic monetarism that, 'Oh, boy, they've printed a lot of money so at some point that has to turn into inflation.' Or, 'If we do this specific amount of quantitative easing, so it will lead to this result.'
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Looking at Japan, it is clear that their quantitative easing measures had the right sign, in the sense of being stimulative, but did not have a predictable or even large short-term result, let alone cause high inflation."

So, once again, we have a member of the MPC who admits that the Bank doesn't have a clue what's going to happen. But he has interesting reasons for not having a clue. And at least he's honest.

One other remark from his testimony is worth mentioning. He says there's a lesson from Japan for fiscal policy as well, which is that fiscal stimulus works - even if it's spent on roads and bridges that no-one uses. But it will only take you so far, according to Posen:

"The key point, though, is that little if any fiscal spending or tax cuts generate sustainable growth without continued expenditure. And I mean that in two senses. First, as Japan demonstrated, you cannot move 13% of your workforce into construction in an advanced economy. It's not a good idea.
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Second, and more importantly, if you do not fix the banking system by the time your stimulus runs out, then private demand will not pick up when the stimulus runs out. That's what we saw in Japan in 1997, and that is what we saw in Japan in 1999-2000. So we have a clock ticking here in the UK as in the US and the euro area."

So, Posen doesn't think that government spending can create a self-sustaining recovery on its own. (At least in the aftermath of a financial crisis like this one.) That is food for thought for the government, now the prime minister is so focused on the contrast between Labour "growth" and Conservative "cuts".

Nor does he think the recovery of the banking system is a done deal. He thinks the clock is still ticking.

Feels like old times. For some weeks now there has been a debate going on between No 10 and No 11 over what the government should say about public spending - and when they should say it. The chancellor thinks the debate is moving his way.

When Lord Mandelson seemed to announce that there would be no official spending review this side of an election, the media took it as a done deal. After all, we had been told Mandelson was now the one pulling the strings, the big winner from last month's painful reshuffle.

If he said it wasn't happening, then surely it wasn't. The fact that he announced it, rather than the chancellor, was only further proof of his new power.

Except, as I said on the Ten O'Clock News that night, that wasn't the Treasury's view at all. In fact, officials there were very clear that the spending review had not been cancelled. Lord Mandelson may have spoken for the prime minister when he talked to Evan Davis on Today. But he did not speak for No 11.

Alistair Darling did effectively delay a proper spending review when he said a while ago that he would not be holding a review before the pre-Budget report. He said he would return to the issue then. That situation still stands. As I said on 29 June, many would say there are strong arguments to have a review sooner, but that's the chancellor's position.

The prime minister and his chancellor had what you might call a lively conversation about Mandelson's interview that Monday morning. The upshot was that the prime minister had to "clarify" his statement later in the day, to the effect that the question of a spending review was entirely the chancellor's decision.

Privately, Alistair Darling has always been clear that he did not think it was credible to go into an election campaign without giving the voters a fairly clear idea of your spending priorities. And as the author of both a PBR and a Budget that laid out the numbers on which all this talk of spending cuts is based, you could hardly say he has hidden the fact that spending is going to be squeezed.

Though he has not openly departed from the prime minister's script on spending cuts the past few weeks, it's been striking for us Treasury-watchers how little he has entered the debate. You did not find him appearing to suggest that spending would not be cut in real terms under Labour.

Nor did Darling rule out the possibility of some form of spending review before the election, albeit without the usual bells and whistles. on Saturday are consistent with that.

I'm not sure whether the PM really thought the government could get through to election day without talking about what parts of government they would spare and what parts they would save. But he clearly wanted to cede less ground on this than his chancellor.

Darling's allies think that Brown is now moving in the chancellor's direction - for example, with his slightly (very slightly) more upfront discussion of the spending cut issue in the week before last, and more candid response to David Cameron in .

I'm not sure the mention of some 'back office savings'" in public services represents much of a damascene conversion by Gordon Brown. But, as I and so many other independent commentators have pointed out, in denying that real cuts in core public services are coming, the facts are against him as well as his chancellor.

Whatever happens, he is finding out what it's like to be PM with an unsackable neighbour next door.

Can Britain and Germany become more alike? That's the strange but important question that took me to Germany this week. You can see the results on the Ten O'Clock News tonight.

As we know, the British - like the Americans - have been world-beating consumers for the past couple of decades. We consumed. And we borrowed.

Despite the folklore, the one didn't fund the other - most of the rise in borrowing over the past decade went into the housing market, not new shoes. But there's no argument that in the boom years, household saving collapsed.

British households saved only around 2% of their income in 2007 and 2008, and the numbers for the US are even worse (though our numbers are flattered by the fact that we measure them slightly differently). Exports weren't exactly a strong suit, either. We had a 3% of GDP current account deficit in 2007 - the US figure was 5.3%.

Coming out of this recession, we know that is something that needs to change. With consumers likely to be saving more and spending less, export-led growth is our main hope of a healthy rate of economic growth, especially if we are going to start reducing government borrowing.

The fall in the pound is supposed to help British firms do better abroad. At Wells & Young's brewery in Bedford, they sell 90% of their beer in the UK, but it's the export market that's been taking off in the past few years.

Their big new markets are Russia, where they sell good old-fashioned British Ale, and the US, where they sell more controversial concoctions like Chocolate Stout and Banana Bread Beer. (Well, I said they were controversial.)

But if British firms are going to export more, they're going to need more foreign demand - even from countries that are more used to exporting to us.

It may be too much to ask Germans to buy British beer. But Germany has been the mirror image of the UK the past few years, only more so. It had a whopping 8% of GDP current account surplus in 2007, and its household savings rate was nearly 11% at the peak of the global boom.

The saving and the exporting are related. If you don't have much of a home consumer market (and your labour market makes it costly to employ workers, especially unskilled workers), you will tend to focus on capital-intensive, export-oriented industries, competing on the basis of a relatively small, highly productive workforce.

This has long been a point of pride. As the German producer helping me with the piece, Kristina Block, told me, Germany likes to call itself the "exportweltmeister".

But it's not much fun being the exporting world champion during the first truly global recession since World War II.

I could see the impact at Hawe Hydraulik, a classic "mittelstand" company in Munich. Founded in 1949 and still family owned, it exports 60% of the hydraulic pumps it makes.

As a result, it's been hammered by the crisis. They started cutting hours back in March and now all of its workers are working a three-day week.

I spoke to Karl Haeusgen, grandson of one of the founders of the company. He told me that orders had fallen over 40% since the start of the year. In contrast to past downturns, demand in every single market was down (with the possible exception of China), so they couldn't offset losses in one region with gains in another.

More than 80% of Germany's economic growth between 2001 and 2007 was due to exports - and of the remaining 20% was largely investment in export-related industries. With the collapse in foreign demand, the IMF now forecasts the German economy will shrink by 6.2% this year - rather worse than the 4.2% fall expected in the UK.

I got to . I had to wait two hours for him in a rather unexciting VIP lounge at Munich Airport, but I think it was worth it.

He's tipped as a rising star in German politics and he is a fervent supporter of the market. Recently, he came out against his own government's decision to prop up the loss-making car-maker, Opel.

I asked him whether Germany needed to become a little more like the UK - more consumer-focused, and less vulnerable to the ups and downs of global demand. He wasn't very keen, to put it mildly. Hee said it would be "an absolute mistake" to move away from Germany's traditions.

Perhaps, I said, he would like Britain to stick to our tradition of buying German goods and running up big trade deficits? "With a big smile on my face, I would say yes", replied the minister.

I wasn't surprised by his reaction. Very few people inside Germany will come out against the great German exporting model. I spoke to one, the respected economist Hans-Werner Sinn, a professor at the University of Munich. But even he was fairly reserved on the subject. You can see why. Until this year, the model had served Germans well (at least if they were not one of the country's many unemployed unskilled workers).

Outside Germany, though, it's another matter. As I've said before - and that 8% of GDP current account surplus figure for 2007 makes clear - if you are worried about a return of large global imbalances coming out of this recession, it's not just China and its trade surpluses you have to worry about. Germany's addiction to exports is a problem as well.

Of course, it doesn't have to be Germany we export more to. But Britain and America are going to have to export more and spend less coming out of this crisis.

Yet, on the basis of my trip, I don't think there's much chance of Germany becoming more like Britain or America, despite the big hit they have taken in the past year.

That's a problem. Because one thing we do know - we can't all export our way out of recession. In effect, that's what the world's economies tried to do in the 1930s. Someone, somewhere, has to buy.

It's make your mind up time for the MPC. Either today or next month, the Bank of England's Monetary Policy Committee has to decide whether to continue with the current policy of "quantitative easing", or take a rest.

I don't know what will happen. There's a spirited debate within the committee on this, and I suspect the members don't know themselves.

In effect, the discussion comes down to this: do you think that QE is mainly about the quantity of money you put into the system - or the degree of "ease" that it provides?

Let me explain. One way to think about QE is as a topping-up exercise. Thanks to the recession, the Bank thinks that nominal GDP - the amount of national output in cash terms- is about 9% lower than it would be in "normal" times. That roughly corresponds to the £125bn the MPC is due to have spent by the end of this month (it's spent about £110bn so far).

If you thought QE was a one-off exercise to get the amount of cash flowing through the economy back up to more normal levels, and encourage similar growth in cash GDP, you could say the job was more or less done. All you need to do is stand back, and wait for that dollop of money to work its way through the system.

That way of looking at QE points in the direction of putting the policy on pause for a while after the £125bn is spent. Or, to let the markets down gently, you might say you were going to spend the final £25bn of the £150bn originally authorised by the chancellor, but at a slower rate.

But that's if you think of QE as a one-off injection. A lot of people think of the policy rather differently, as an ongoing stimulus, requiring continual injections of cash.

Economists who emphasize the policy's effect on government bond yields - and thus long-term borrowing rates - tend to think of it in this way. They think it would be disastrous to stop now.

As I've discussed in the past, QE is an "all things to all men" kind of policy - its supporters have a lot of different explanations for why it will work.

Some focus on the direct impact on the money supply, others on the level of bank reserves and the quantity of bank lending, and still others on the impact on public and private borrowing rates (I went through the various channels in some detail on 5 March).

Up until now, it hasn't really mattered which one you support. In fact, Bank officials have tended to talk of all these mechanisms operating at the same time. But now it is starting to matter.

That's because, if you think that the quantitative, money supply channel is what matters, the job might almost be done. But if your focus is on government bond yields and the level of bank lending, QE has barely begun. Government bond yields are now almost exactly where they were when the policy started.

As I've said many times before, a lot of other things have been happening since March - notably an explosion in estimates of government borrowing. But if you think bond yields are the key channel through which QE supports the economy, you're not going to want to turn the tap off anytime soon.

As ever, it's (even) more complicated than this. For starters, as we know, these are not normal times for the demand for money, so that one-for-one correlation between the amount injected into the economy and the level of nominal GDP may not hold. If people simply hang on to the cash, you might need to spend more to have the same effect.

However, by spending £125bn, the MPC has already assumed a much higher degree of cash hoarding than you would normally expect. The Bank is assuming that these usual multiplier effects - through the banks lending on the money, which in turn gets deposited and lent on to others - largely do not apply. Even in these strange times for the financial system, £125bn is an awful lot of cash to inject into the economy in five months.

It's striking that the governor, Mervyn King, has always tended to stress the quantitative side of QE - the impact on the broad money supply, and cash GDP. At repeated press conferences he has gone out of his way to downplay the likely effect of QE on bank lending, and (to a lesser extent) government bond yields.

You might think that would point him in the direction of giving QE a rest, either at the end of this month or (more likely) the month after that.

But we also know that he thinks the economy could be much weaker coming out of this recession than the optimists hope. And that the fears of inflation resulting from QE (such as those voiced by ) are greatly overdone.

So, it's a dilemma. For what it's worth, I think they could announce a further £25bn in asset purchases today, but they won't decide what happens after that until at least their August meeting, when they will also have new inflation report forecasts to consider.

We'll find out soon enough.

Update, 12:30: The statement stands for itself: the MPC has indeed deferred a major decision on the future of QE until the August meeting, when they will have the new economic forecasts in the Inflation report in front of them.

Many had expected them to authorise a further £25bn in purchases, to lessen market uncertainty in early August when the existing £125bn will have been spent. They could then have discussed at the August meeting whether to ask the chancellor to underwrite purchases of more than £150bn, or to put the policy on hold.

It is interesting that they did not feel able to pre-announce any additional purchases under QE at this time, despite the risk of creating market uncertainty between now and August.

Clearly, they do not consider the continuation of the policy to be a done deal. It may not be the most likely outcome, but on the basis of this decision there is a real possibility that QE will be put on hold after the end of this month.

The global recession is dead. Long live the global recession.

That is the basic message of the . Overall, it thinks global output has probably stopped falling in the past few months. But that's almost entirely due to better economic times in China and India. In the advanced economies we'll be feeling the pain for some time to come.

It's a remarkable sign of the times that the global economy could be said to be growing, even as the US and the euro area - responsible for at least 40% of global GDP - continue to shrink.

As the chart below shows, the Fund's economists have decided that the emerging economies might be able to "decouple" after all, at least the ones in Asia.

They do think the advanced economies might start to recover earlier than previously forecast, with very modest growth towards the end of this year. The US forecast for 2009 has been nudged up a little, and it's now expected to grow by 0.8% in 2010, instead of not growing at all.

And the UK forecast for next year is also up, with growth of 0.2% now in 2010 instead of another year of decline (though the forecast is down a little for 2009 - thanks to that unexpectedly bad out-turn in the first few months).

But all the action for the next year or two is expected to be in the developing countries - or, to be more precise, India and China. China is now expected to grow by 7.5% this year and 8.5% in 2010.

For India the figures are 5.4% and 6.5%. All these forecasts are about a percentage point higher than they were in April.

As you'll remember, "decoupling" was all the rage in 2007, though the term meant different things to different folks.

The weaker version of the theory was simply that the emerging economies might be able to continue to grow, even if the US and other advanced economies did not.

The stronger version said that China, India and the rest could not only grow in the face of a recession in the West, but actually help to pull our economies out.

When the crisis in the advanced economies hit demand for emerging market exports last year, all versions of the decoupling thesis started to look painfully naive.

As the chart shows, most of these economies were dragged into recession as well. But one year on, their recessions look likely to be a lot briefer, and more "V" shaped than ours.

It may not be true decoupling - as the IMF warns, the recent acceleration in growth in some of these economies could peter out if the advanced economies fail to pick up.

We also have to remember that most of these economies, with their rapid population growth, need much faster growth than we do, to achieve any growth at all in income per head. Their "normal" growth rate is a lot faster than ours.

But the idea that the emerging world can get along OK without us looks slightly less mad than it did.

Yes, the collapse in world trade has hit the developing economies hard. The IMF now expects the volume of world trade to shrink by more than 12%, even more than before. And the rich economies have been buying much less from the rest of the world - their imports are now expected to fall by nearly 14% in 2009. That has affected the demand for developing country exports, but not by as much as you might have thought.

Overall, their exports are expected to fall by "only" 6.5% this year. Of course, some have been hit harder than others. But if you are China or India, decoupling lives - at least in the weakest sense of the term. Whether either of these emerging behemoths can help speed up our own slow return to economic health is another matter.

Things could be worse. With so much of the week spent digesting bad news about the economy and the public finances, I thought I'd end it with some reasons to be cheerful.

The first is that, all things considered, UK plc has come out of the past year rather better than you might have expected. Outside the banking and energy sectors, corporate profits have fallen by far less than in either of the past two recessions.

Non-financial corporate profits have now fallen by 7.5% from their peak. That's roughly the fall we saw in 2001-2, despite a recession we now know to have been on a par with the early 80s, and twice as bad as 1990-1992. In the early 80s recession, the total fall in non-financial corporate profits was 23%. In the early 90s, it was 11%.

This recession isn't over yet. Profits may yet fall further. But clearly, something has gone right this time. And that something appears to be the labour market.

As Jamie Dannhauser, of , points out in his latest UK report, the greater flexibility of the labour market seems to have made it possible for firms to squeeze labour costs over the past year, without laying so many workers off.

All those "voluntary" pay cuts or wage freezes, reductions in hours, and slashing of bonuses (this is outside the financial sector, remember) means that total labour costs per worker have actually fallen by 1.2% in the past year.

That's quite remarkable. We think of the US having the most flexible labour market - and companies there have also fared less badly in profit terms than in past recessions. But even there, labour costs per worker are still going up.

One year into the last recession, costs per private sector worker in the UK were still growing at 10%, which ultimately led companies to shed 7% of the private sector workforce to rebuild profits.

Of course, you may not care what has happened to corporate profits (even though you probably should). But we can all be cheered if greater flexibility has meant fewer people losing their jobs.

Unemployment has risen by 1.9 percentage points since the recession began, to 7.2%, and we know that it will rise further. That is a big rise. But the scale of the decline in national output during this period would have led you to expect a lot worse.

We saw a similar increase in the first year of the last recession, when the decline in GDP was only half as great (at this stage in the last recession, the unemployment rate stood at 8.7%).

Yes, there are plenty of caveats about who is included in that headline figure, and who is not. But even with all the caveats, a given percentage point decline in GDP seems to be translating into a smaller number of jobs lost.

As I said at the start, there's much that's going badly in this economy - and plenty of room for more bad news in the future. But at least some things appear to be going better than they have in the past.

Does anyone believe the government's own spending assumptions? I ask because this week both the prime minister and the first secretary of state (aka Lord Mandelson) have seemed to suggest that they were a bit iffy.

Okay, so they didn't exactly put it that way. But that was the implication.

Consider, first, the prime minister, in with the leader of the opposition. In round three (or is it 42?) of the Spending Cuts Saga, he once again insisted that current spending would rise after 2011 under Labour, but be cut by the Conservatives.

I won't go back over the main elements of the spending row right now (I have written a quick primer on the numbers below, for those that want it). But for me, one of the big unanswered questions in this debate has been whether or not the government actually disputes the IFS numbers which are so often quoted against them.

All that the Treasury says is that "they are not our numbers". But, at times, both the prime minister and Ed Balls have appeared to suggest that there will be more space for spending growth than the IFS implies, because unemployment and other "unavoidable" costs will be lower than they think.

The PM was gesturing in this direction today when he said that Mr Cameron's spending plans were based on a rise in unemployment "because you will do absolutely nothing about it".

But, you'll recall that the Conservative figures are taken from the IFS, which are themselves based largely on the Budget's own unemployment forecasts, or the Department for Work and Pension's long-term forecasts for benefit spending.

So any problem the prime minister has with the Conservative/IFS numbers would surely apply to the government's numbers as well. I wonder if the prime minister knows something the chancellor doesn't.

I had the same thought listening to , when he said that it wouldn't be right to make spending plans based on "speculative projections".

The first secretary of state said "we are not in a position to be able to forecast what growth will be or the performance of the economy will be in 2011-12". Evan Davis pointed out that the Budget had indeed made just such a forecast - in fact, based the government's spending and tax plans on it.

Mandelson replied that any such forecasts were "entirely speculative," and it would be better to base spending on "reality, not speculation".

So, neither the prime minister nor Lord Mandelson seem to put much store by what the Treasury says these days. Curious times indeed.

PS. A PRIMER ON THE SPENDING DEBATE

There have been some interesting twists and turns along the way, but these are the basic facts which have kept the barbs flying over the dispatch box for so many weeks.

The numbers in the Budget suggest that total spending between 2011 and 2014 will fall in real terms by 0.1% a year. In other words, essentially flat.

But that total includes a massive (and now much-discussed) cut in capital spending of 17.3% a year over that period. The prime minister suggested recently that asset sales would make up the difference, but the government has not identified things to sell that would come close to filling the gap.

That leaves current spending - everything that isn't capital investment. That is due to grow in real terms by 0.7% a year, the lowest growth since 1997-2000 when Labour was following through on the previous government's spending plans.

So, current spending will grow from 2011 to 2014, as the prime minister suggested today. But, as has been thrashed out many times over the past few weeks, that figure includes the rising cost of social security and debt interest. If you take those and other "uncontrollables" into account, the IFS says that current spending on everything else will fall in real terms by 2.3% a year.

If you protect health and development spending from real terms cuts, as the shadow chancellor promised once again yesterday in his interview with Nick Robinson, other current spending would have to fall by 3.3% a year in real terms - or roughly 10% over three years. If schools are also protected, as Ed Balls has sometimes suggested, there would need to be cuts in other spending of 13.5% over three years.

We had a few weeks in the thrall of green shoots. Now the phrase de jour is "double-dip".

I doubt that the real economic situation has changed as dramatically as the headlines. But it's right to worry about the recovery petering out.

As I , we are back from the brink. That doesn't mean the economy is about to scale new heights.

This morning's CIPS/Markit Purchasing Managers' Index for June tells the story. It shows the first increase in manufacturing production since March 2008.

Across the board, the index looks healthier than it did in the first few months of the year.

And yet, employment is still falling at a rapid rate, and the headline index is still below the "neutral" 50% mark for the 15th month in a row.

As reminded us, the key weaknesses hanging over the economy have not gone away. We've just been averting our gaze.

Consider the financial system. Mervyn King and others have long warned that the embattled state of bank balance sheets could make for an unusually slow pick-up in lending, and as a result a painfully slow recovery.

That concern has not gone away. Far from it. Yesterday. Bank of England figures yesterday showed no rise at all in May in net lending secured on property, for the first since those records began in 1933.

We also had encouraging house price figures from Nationwide - the third monthly rise in four months. But even many estate agents say they doubt the improvement will last. The number of houses actually changing hands at these prices is tiny.

The same is true of the household sector. We now know that the household saving rate fell from 4% to 3% of their income in the first quarter, perhaps because wages and salaries fell 2% in the same period.

Yet we know that people are likely to want to save more in the future, to repair their own balance sheets - a lot more than 3% of their income, if history is any guide.

If their income isn't going up, the only way that happens is through lower spending.

Think through the implications of that for businesses. Assume a company was operating at 100% capacity a year ago. Then that fell to 60-70% during the winter (of course a lot of industries suffered even greater falls than that).

Perhaps they are back to 80% now. But if demand stays at that level, it doesn't matter that things are better than they were. They could still go out of business.

As I pointed out on the Ten O'Clock News last night, we had a similar 2.4% drop in GDP in the autumn of 1979. Then the economy bounced back, to grow by 1%, only to tip into recession for the whole of 1980.