91Èȱ¬

It wasn't a bad dream. The recovery really did stall in the final three months of 2010, and it wasn't only the weather. That is the most important conclusion to be drawn from today's second round of GDP estimates for the fourth quarter.

Most City experts were expecting little change in these numbers - and they were right. No-one should read too much into the extra 0.1% that has been taken off output, taking it from minus 0.5% to minus 0.6%.

As the chief economist of the ONS, Joe Grice, commented as the numbers were coming out, that 0.1% change is well within the margin of error. In the past five years, the average revision, in either direction, between the first estimate and the version three years later has been 0.16%. If you extend the time frame, the average change is much larger.

Many will doubtless find it symbolically important that the ONS has revised down the output number, but not changed its estimate of the negative effect of the weather. If the ONS is right, the new figures suggest that the economy would have contracted, very slightly, in the fourth quarter, even if the sun had been shining throughout. But symbolic or otherwise, the same caveat applies, with bells on.

There is even more uncertainty around that 0.5% estimate of the weather impact than there is surrounding the output number itself: no-one should put much store behind the minus 0.1% you get from subtracting one from the other. The basic message of both estimates is that, absent the bad weather, the economy was flat.

Those looking for bad news in these figures (and that is usually everyone) might do better looking beyond the first page, to the trade and investment tables towards the back. Investment was 2.5% down on the previous quarter, and was a key factor in the slowdown. And net trade, once again, made a negative contribution to the recovery - exports growing 2.3%, but imports up 3%.

The ONS do not provide any further breakdown on their estimate of the weather effect: they just say it hasn't changed. Perhaps exporters were worse affected than importers by the snow - that is certainly plausible. But weather or not, we are still waiting for the fall in the pound to generate a significant upturn in the UK's net trade. And we are still waiting for lasting growth in investment.

We thought the minutes of the February Monetary Policy Committee (MPC) meeting might be interesting, and they are. Instead of two votes for a rate rise, there were three, with the Bank's chief economist, Spencer Dale, changing sides to support a quarter point increase. There left six who wanted to rates to stay the same.

A further twist was that the rate-riser in chief, Andrew Sentance, voted this time for a half point rise. With Adam Posen wanting even more quantitative easing to support the economy, we now have nine members of the committee and four different votes.

"Now I am six, I'm as clever as clever, so I think I'll be six now for ever and ever." That's what AA Milne wrote, but it's not what the financial markets expect.

The implication of last week's Inflation Report was that rate rises were coming this year - probably before the summer. On the basis of these minutes, some in the City are now expecting a rate rise as soon as next month.

Is that likely? The answer is it is certainly possible. According to the minutes:

"Most members agreed that the balance of risks to inflation in the medium term relative to the target had moved upwards in recent months and the case for withdrawing some of the current exceptionally accommodative monetary policy had consequently been strengthened."

Spencer Dale's move is not a big surprise. He's been voicing concern about the distorting effect of super-low rates for well over a year. The debate that matters now is the debate among the four Bank officials on the MPC who didn't vote for a change in policy - Mervyn King, Charlie Bean, Paul Tucker, and Paul Fisher - along with the other external member, David Miles.

According to the minutes, they have different views on whether the upside risks to inflation are likely to materialise.

Adam Posen is clearly one who thinks the risks are limited, "given that the change in the near-term outlook could clearly be explained by reference to recent increases in energy, other commodity and world export prices".

He argued yesterday, in a combative speech on the subject, that there was not much evidence that inflation expectations had risen a long way from their long-term average. And even if you expect inflation to rise, that doesn't necessarily mean you will be able to extract a larger wage rise from your employer to compensate.

But the language of the minutes here is very reminiscent of Mervyn King's comments on the subject. He is probably also in the sub-group that is relatively further from a rate rise.

On the basis of his recent speeches on the subject, I would guess that David Miles was in this category as well, but we might hear more from him on that subject in a speech later today.

That leaves Charlie Bean, Paul Tucker and Paul Fisher as, possibly, the members who did not vote for a rate rise but think "the case for an increase has nevertheless grown in strength".

My sense is that any or all of them could vote for a rate rise in the next few months - with Deputy Governor Bean perhaps the most likely to jump.

But there is a word of warning in here for those who now expect a rate rise next month. The minutes make clear that the members who did not vote for a change in February would like to wait "to see indicators of how the economy performed at the start of the year" to help assess whether the fall in the fourth quarter was a blip, or the start of something more serious.

Two weeks ago, they did not think we could say for sure whether the slowdown had continued in 2011. As the minutes suggest, the evidence before them was mixed.

True, there have been strong signs of life in the business sector, but household confidence has fallen sharply.

Will they have a much clearer sense of what's going on with the recovery in two weeks' time, when they gather around the table again? Some will say so. But, absent a major upward revision to that fourth quarter number for GDP on Friday, it's hard to see what could substantially strengthen the hawks' case between now and 9 March.

If we don't see a big change in that GDP number on Friday, my hunch is that most, if not all, of the MPC six will want to see data for the first three months of 2011 before making a move.

You might think they would leave the serious debate until May, when they will not only have the new Inflation Report forecasts in front of them, but the first estimate for growth in the first quarter as well.

Clearly, the chances of a rate rise before then have risen on the basis of these minutes. But remember, two members would need to change their minds. That is far from a done deal. "Clever as clever" they may be, and they could be six on the MPC for a few months' yet.

Today's public finance figures for January are well above market expectations, and somewhat reassuring - at least when compared with last year's. January, you'll remember, is traditionally a "bumper" month for the tax man, with a surge in corporation tax receipts and all those self-assessment payments starting to come in.

Last year, January was a shocker: the government borrowed £1.3bn, the first January deficit since they started reporting monthly numbers. The consensus forecast for this year was for a tiny surplus - maybe £0.1bn. Instead the Treasury took in £3.7bn more than it spent, the largest surplus since before the collapse of Lehmans.

Borrowing in earlier months has also been revised down a little, leaving the deficit on course for a year-end total of around £140bn, nearly £10bn less than the OBR forecast of £149bn for 2010-11.

Two quick points to make about these numbers. The first is that the Treasury doesn't want you to get too excited about them. It is a peculiar feature of the current political debate that ministers are keen to talk down any sign that the public finances are stronger than we might have thought, but equally keen to talk down signs of weakness in the economy.

There may be only 2 full months left in this financial year, but there is still plenty that could go wrong. Officials point out that the comparison with last January is distorted by one-off changes in the timing of self-assessment payments, which will unwind next month (when revenues from that quarter are likely to be less than usual).

They also note that net borrowing by local authorities is playing a big role in the unexpectedly large fall in total government borrowing - and that is very prone to revision. (Though it could be revised down as well as up - indeed, it was partly lower than expected borrowing by local authorities that led the 2009-10 deficit came in significantly below Alistair Darling's budget-time forecast last year.)

Taking these and other one-off factors into account, the Treasury insists that the Chancellor is roughly on course to roughly meet his deficit target for this year, with less room for manouevre than the January figures suggest. But even with the caveats, I wonder whether they are erring on the side of caution. The IFS, along with most city forecasters, are still expecting an undershoot in the region of £5bn.

The more obvious, second, point is that the economy seems to be growing. As I noted when those fourth quarter GDP figures came out last month, it is very odd to have the economy shrinking by 0.5% at the same time as tax revenues are coming in exactly as forecast - if not a little faster. On Friday we find out whether the ONS has revised those numbers up a bit, as many independent forecasters suspect they will. However, we can surely say, on the basis of these figures, that the economy is unlikely to have continued shrinking in January.

Income and capital gains tax receipts were up 18% year on year, and corporation tax receipts were up 13% on the same basis. Some of the growth is coming from higher inflation (ie growth in nominal GDP, rather than real), and naturally the figures are somewhat backward-looking. But these are not numbers you would expect to see if the British economy was suffering a prolonged downward lurch.

It's a fair bet that there will never be another film on general release that features both Matt Damon and the FT's Chief Economic Commentator, Martin Wolf. Inside Job, the documentary about the financial crisis which comes out in Britain this weekend, also has an Oscar nomination for best documentary film, and some really pretty pictures of Iceland.

So, you can imagine it wasn't hard to persuade me to review the film for Radio 4's Front Row programme. There have been plenty of documentaries about the crisis - like the superb "The Love of Money" series for 91Èȱ¬2. But Charles Ferguson's polemic probably has the highest production values, and the most excruciating interview footage.

Several of the protagonists interviewed in the film - none of them new to the business of talking to journalists - get deliciously skewered by Ferguson's quiet but insistent questioning. Senior academic economists who were paid large amounts to say nice things about, say, the Icelandic financial system, come off particularly badly.

Does the film tell us anything we didn't already know? I guess it depends how much time you have spent investigating the roots of the financial crisis. He doesn't uncover anything profoundly new about the financial mechanics at the heart of it (though he does have some nifty graphics to explain asset-backed securities, CDOs and the rest).

But there are some interesting outer layers: we don't just meet the academics who, knowingly or otherwise, provided intellectual cover for Wall Street's increasingly toxic financial innovations, there's also one of the "madams" who helped provide other kinds of support to the financial hotshots. (One tidbit: according to one of the interviewees featured in the film, the guys at Morgan Stanley didn't go in for a lot of drugs and hookers, but plenty of others did.)

Those are the strengths of the film. The weakness is that it takes its crusading a little far. You know before you go in that this is not going to be a balanced film: there's not a lot of the "bankers' point of view". Nor would you necessarily expect it in a polemic of this kind. But in the last half an hour, it starts to lose focus, until more or less everything bad that's happened in America and Britain in the past 20-30 years is tied up together in a massive capitalist conspiracy of government and banks against the ordinary man. You either buy his thesis, or you don't. But in the screening I went to, that is where audience interest started to flag.

It was fun and refreshing to see the academic economists come in for criticism for their role in the crisis: they've been missing from most other documentaries on the crisis. And the economics profession does seem to have an issue of transparency here.

In the film, the head of the Harvard Economics Department, the well-liked and respected British economist, John Campbell, appears literally flabberghasted by the suggestion that economists writing supportive papers about, say, financial deregulation, should reveal who has paid for their research - just as medical researchers would reveal that Pfizer had paid for the research which revealed their drug was a miracle cure. You might not accept the comparison. But within the economics community on this very issue.

The problem, for me, was that it was almost too flattering to economists - and economics as a subject - to suggest that they made so many mistakes in the lead up to the crisis because they were in the pay of the bankers. As I've written in the past, the crisis shone a harsh light on the failings of mainstream macroeconomists and financial theorists, but it was an intellectual failure as much as an ethical one. What the film seems to miss is that many of them got it wrong for free.

Mervyn King today said he had great sympathy for ordinary families who are seeing their real living standards squeezed by rising prices. But in his quarterly press conference he had little time for critics who say Britain's central bank should have done more to keep inflation in check.

A year ago, the Monetary Policy Committee was expecting the target measure of inflation would now be around 1%. Instead it is 4%.

But the governor said that nearly all of the overshoot could be explained by unexpected shocks - which had surprised the financial markets as well. If the Bank had raised rates to keep inflation on target - households would simply have been hurt by a shrinking economy instead.

In a letter to the chancellor yesterday, the governor had appeared to signal that rates would need to rise for inflation to return to target. Today he said the MPC would take it one month at a time.

But the forecasts show the Bank now expects growth to be slightly weaker than it did three months ago - and inflation to be higher. The implication is that bank rate will need to go up sooner than the MPC previously thought, and without such a strong economic recovery.

Mervyn King's 10th letter to Number 11 Downing Street is similar to many of the other ones he's written. In his view, the 4% rise in the CPI in the past 12 months is unfortunate - but temporary, and almost entirely driven by factors beyond the Bank's control.

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He insists that the MPC has not "lost control of inflation". Every nation can set its own inflation rate, and by squeezing the domestic economy, the Bank could certainly speed up the space at which inflation goes back to 2%. But any sharp rises in the base rate to achieve this would run the risk of stalling a recovery which may already have stalled. If that happened, the Bank could find itself lowering rates again, before the end of the year.

So readeth the gospel according to Mervyn King, so elegantly described in his recent speech. But there are some objections to this approach, which are causing some nervousness within the Bank.

First, there are those who wonder whether all of the most recent price rises can necessarily be blamed on outside factors, or the chancellor. The MPC has lately taken much comfort from the fact that the CPIY - the measure which excludes indirect taxes - was growing at an annual rate of less than 2%. But in January, that index was 2.4% higher than a year earlier, up from 2% in December. The CPI-CT, which holds indirect taxes constant, rose by 2.3%, up from 1.9% the previous month.

This does not prove the governor wrong: until this month, I would say that the majority of City experts have agreed with him that most of the upward pressure comes from the fall in the pound, VAT changes, and global changes in the price of food, energy and other commodities. But there are some warning flags in the January numbers. And you have to wonder how long it can take for a depreciation that largely happened in 2007 to have its full effect.

More important, if the governor believes - as he says he does - that ultimately the UK can set its own inflation rate, it's not clear that it's relevant where the price pressure comes from. What matters is whether it's temporary.

This brings us to a second objection, which I discussed at length on Friday: the notion that the Bank is responding differently to today's malevolent external price pressures than it did to more benign ones, when world prices were falling in the first part of the 21st Century.

As I said on Friday, the Bank has a response to this: not least in the fact that the average rate of CPI inflation since May 1997 has been fractionally below 2% and the average rate of the old, broader measure, RPI-X, has been only slightly above the 2.5% target. They have not so far allowed changes in the global terms of trade to permanently affect the domestic price level.

Bank officials don't publicly discuss this argument because it makes them uncomfortable. If inflation went below the target in the noughties, that was by accident, not by design. The same applies to today's overshoots. When it comes to missing the target, the MPC prefer to be hung as fools. Openly accepting the knavish view - that it is better for the economy, long term, for inflation to overshoot - is a slippery slope.

Tomorrow, we will see how and whether the Bank has changed its forecasts as a result of the last few months' disappointing inflation and GDP numbers. We will see how far it has revised down its growth forecasts as a result of that first estimate for the fourth quarter. Crucially, we will also see whether it is still expecting inflation to be at or below target at the end of the forecast period, on unchanged interest rates. I would be very surprised if we did.

In Beijing they have been celebrating for a while, but today it's official: China has overtaken Japan as the second largest economy in the world.

It's easy for economists to be sniffy about "psychologically important" landmarks which are measured in dollars and cents. "Purchasing Power Parity" (PPP) estimates of national income, which allow for the fact that a dollar goes a lot further in China than it does in Japan, have put China second in the world ranking for years.

In PPP terms, Chinese gross domestic product (GDP) is more than twice Japan's; in that sense, China is already much richer than the nominal rankings suggest. But it is also much, much poorer. It may be number two by size, but ranked by income per head it is about 95th: slightly above Namibia, but behind Belize. China's average living standards are now roughly a fifth of America's. That is where Japan was in 1950.

And yet, this 'nominal' landmark comes at a time of real importance for China and its global role. Suddenly, it seems, we all care what happens to China. And we all seem to have a view on how the next stage of its extraordinary economic and political transition will unfold.

Historically, the birth of new economic superpowers has caused great global instability - and conflict, more often than not. Much ink has been spilled on how China's role will affect the global balance of power.

Some, such as the US commentator and foreign policy expert, Les Gelb, say that China will not be as disruptive as Germany or Japan were, in the first decades of their development, because China's sheer size, and poverty, mean they have to put economic development before anything else. On the other side, Stewart Patrick, writing in the November/December edition of Foreign Affairs, is one of those who warn that China could be more of a "spoiler", long term, than the White House likes to think.

These are interesting geopolitical questions for the rest of the world to ponder. I want to very briefly list the big economic questions for China and its government, as they get used to being number two.

First, does it really want to have a global currency? This might sound like a small piece of the puzzle, but it actually gets to the heart of whether China is ready to be an economic superpower. As I discussed in my recent blog about the dollar's status (link to "Exhorbitant Privilege" blog from Davos), even if China overtakes the US in terms of national output, its currency won't be a serious rival to the dollar until China opens its capital account and frees up its financial system.

Put it another way - the authorities have to be willing to not just let foreign investors put money in China, but for Chinese people to send money out. And they have to take the consequences of those inflows and outflows for the value of exchange rate. There's not much sign that the government is ready for that kind of loss of control, even if the leadership are taking small steps towards boosting the yuan's global role.

Second, does China's government really want to move to a consumption-based economy? Aside from the size of its population, the two most striking facts about China's economy are its extraordinarily high investment rate and its low consumption. China's gross investment rate in 2009 was 46% of national income, up from 32% in the late 1990s. The flipside to rising investment has been declining consumption by households, which has fallen to only 36% of GDP.

As in Japan and South Korea in the 60s and 70s, very high levels of investment has produced a large quantity of growth - but its quality leaves a lot to be desired. Hundreds of millions of people have been lifted out of poverty since 1980, but Chinese living standards have not grown nearly as fast as the country's economic growth ought to imply.

Why? Because throughout this period of rapid development, the government has put industry and exporters first. Wages and the exchange rate have been kept artificially low and, as I wrote in detail a few months ago, households have had their savings constantly taxed away, by state-controlled banks offering interest rates well below the rate of inflation - if they offer an interest rate in savings at all. (The financial system doesn't provide reliable finance for smaller private companies either, which is why the corporate savings rate is also unusually high in China.)

Again, China's leaders say they want to move to a more consumption-based economy. But as a simple matter of arithmetic, China cannot raise its consumption, or reduce its national savings rate - not to mention its counterpart, which is China's enormous current account surplus - without also reducing its rate of investment. And that is not a simple matter of arithmetic at all.

Of course, China is acquiring the external trappings of a consumer-based economy; go to Beijing or any other major city and you'll see plenty of people ostentatiously spending a lot of cash. But that is scratching the surface. For those national savings and investment numbers to change, and for ordinary households to get a larger share in the country's success, the entire axis of China's economic policy-making needs to shift, so it stops revolving around exporters and producers, and revolves around households and consumers instead.

China's leaders are not very far down that road today. Indeed, some might question whether they were on it at all.

Has the Bank been double-dealing on inflation? That's the criticism which makes members of the MPC nervous, even those who are comfortable with leaving policy unchanged this week, for the 14th month in a row.

The charge is that, whatever you think about the Bank's current approach, it's inconsistent with the way it acted in the early years of this century, when the imported price pressures were pushing prices down, not up. The suspicion is that the long-term target isn't really 2%, it's a bit higher - because overshoots are tolerated, but undershoots are not.

The case for the prosecution starts with that earlier period, roughly 1998-2005, when globalisation seemed to be a force for "good" deflation, and the price of toys, clothes, shoes and anything else with a "Made in China" sticker was falling. In a sense, the Bank faced the same choice then that it does now, only in reverse. It could either let inflation stray from target for an extended period - in that case, below it - as a result of this external "shock", or it could set official interest rates to meet the target, in effect forcing domestic prices to adjust instead.

As it happens, I had many conversations about this with senior people at the Bank at the time. (I was much taken with the idea that globalisation had weakened the link between domestic monetary policy and domestic inflation.)

The Bank's view, clearly expressed was that globalisation did not, in the long run, undermine a central bank's ability to control domestic inflation. He also suggested that the Bank should stick to its remit and focus on the overall price level, not relative price shifts within it:

"Imports are only one part of the consumption basket, and what happens to the general price level also depends on what happens to the prices of domestically-produced goods and services. The prices of tradable goods that are close substitutes for the imports may be driven down, but the prices of other goods and especially non-tradable services can rise faster. This may happen automatically, if consumers react to the rise in purchasing power associated with cheaper imports to increase their spending on other goods and services, driving up their prices. But even if it doesn't, the overall inflation rate should in the long run remain unchanged, provided that the monetary authorities ensure that steady growth in overall nominal demand is maintained through an appropriate monetary policy. If a country does not fix its exchange rate and is free to pursue an independent monetary policy, it can ultimately always choose its own inflation rate."

In plain english, this says that the Bank of England shouldn't be too worried about which prices in the economy are falling and which prices are rising. What matters is what is happening to the price level overall. You should enjoy the fact that your children's (imported) toys and shoes are getting cheaper, but don't be surprised if the price of (not imported) childcare goes up instead.

Charlie Bean has some interesting - and highly relevant - things to say, later on in that speech, about the impact that these terms of trade shocks could have on economic growth. I hope to get into those in a later post. My goal, here, is to get to the bottom of this question of whether the Bank has been inconsistent.

The strong perception in the City, and even among some in the Bank, is that they have. They have been more tolerant of inflation going above target in the last few years than they were of potential undershoots in the target, when external pressures were more benign. The MPC might have followed the Bean approach in 2006 - but not in 2010.

You can make a case for that kind of asymmetric approach: when there's a risk of a deflationary spiral in an environment of very high private and public debt, the potential cost of allowing inflation to slip to zero are almost certainly greater than letting it go to 4%. But this is not an argument that the Bank has chosen to make in defending its record.

Nor has the Bank ever published a forecast, in either period, showing inflation significantly off target at the end of the "forecast period" (though they did, somewhat sneakily, extend the forecast period from two to three years a while back.) If it's got an asymmetric inflation target, the MPC has not told the Chancellor or anyone else about it. The line at the Bank is that they have simply got their forecasts wrong.

The best way to answer the issue is to look at the evidence. The chart below shows what has happened to goods and services prices, and the CPI, since the Bank became independent in 1997. It's actually an updated version of the chart Charlie Bean used to illustrate his point in that 2006 speech.

The chart shows clearly how the price of goods - which these days tend to be set globally - fell consistently in the first part of the century. That is what you might call the 'China effect'. You can also see that the inflation rate for services, most of which are not subject to foreign competition, rose over the same period - just as Bean suggests in that speech.

Then, look how the situation changes in the later period: a couple of upward lurches in goods price inflation, which have not been offset by falling inflation elsewhere. It looks like a step change, up, in the CPI.

Game set and match, you might think, to the critics of the Bank. Except - you can't help but notice that CPI inflation was below 2% for most of the 1998-2005 period. For much longer, in fact, than CPI has been above target now.

True, they were not targeting the CPI then: the target was RPIX inflation of 2.5%. But when the change was made, the new target of 2% was felt to compensate for the fact that RPIX tended to be higher. In other words, if there were a significant bias, you would expect to see it in the CPI as well as the broader measure

It's also true that the external price shock has been much sharper, in this more recent period - and much less predictable. The price of manufactured imports has risen by 24% since the end of 2006; the fall in the previous ten years was in the region of 12%.

Finally, if there had been a consistent bias in the Bank's approach you'd expect to see it in the results: in the long run average rate of inflation since 1997. Here's the most interesting nugget of all: the average annual rate of CPI inflation for every month since 1997 has been 1.9% The average inflation rate on the old RPIX measure has been 2.76%.

What those figures tell you is that the cumulative overshoots in CPI inflation in this later period have actually been smaller than the undershoots that occurred before 2005. They also tell you that, if the Bank does have a secret, higher, inflation target, they've not been very good at delivering it.

Every chief executive likes to say the company's employees are its "most valuable asset". But is that ever more than empty slogan?

That was one of the subjects I discussed with my guests this week on the Radio 4 programme, The Bottom Line.

In the studio I had Tim Watkins, vice president of the western arm of Chinese telecommunications company Huawei, Richard Fenning, chief executive of global security consultancy Control Risks, and Vineet Nayar, chief executive of Indian IT services company HCL Technologies.

I was worried they would all agree: employees come first.

But they each had a very different take, and Vineet Nayar was the only one willing to state that his staff were more important than his customers. His philosophy of 'putting customers second' to employees has been causing a stir at the world's leading business schools.

At HCL, every employee can contribute, anonymously, to the chief executive's annual appraisal, which is then published on the internal website. The other guests didn't fancy that at all.

Staff are crucial to Control Risks (and they are not all ex-army or former-spies, as the folklore would suggest). But Richard Fenning wasn't willing to say that he'd put them ahead of the client. Maybe that's not so surprising either, given that Control Risks will often be sending staff into countries that others are trying to flee.

With events in Egypt in the headlines, we discussed how businesses ought to deal with political instability - and how to judge when a political crisis has turned into an opportunity. (Of course, every crisis is an opportunity if you're Control Risks.)

Since he's the expert, I got Mr Fenning to tell us his top global hotspots to watch out for in 2011. You'll have to listen (or watch, on the 91Èȱ¬ News channel) to find out which very large country, not so very far from the UK, came first on his list.

Project Merlin and the banks have drowned out both Wednesday's trade figures, and the business secretary's White Paper on boosting UK exports. That is probably just as well. The figures underline how difficult it will be for that White Paper to deliver.

The new data show the trade deficit for 2010 was a record £46.2bn, up from £30.0bn in 2009. As a share of the economy, the goods deficit - at around 6.7% of national income - was also higher than it has ever been.

Worringly for the Bank of England, this was partly due to rising import prices - which seem, if anything, to be picking up pace. Import prices rose by 1.5% between November and December, and are more than 7% higher than a year ago.

Exports fell in December, but we can at least say that goods exports were 11% higher in the last three months of 2010 than they were in the same period of 2009. Unfortunately, as the deficit figures suggest, imports have been rising even faster.

There has been decent growth in the volume of exports going to the European Union - a reminder that a large part of Europe (including key export destinations such as Germany) are doing much better than the grim talk of a 'continent in crisis' might suggest.

But, there's no getting around the fact that we ought to be selling more to countries further afield - particularly the Brics.

The quick-witted among you will have noticed immediately that the high bars are mostly on the far right hand side. In other words, the countries we export most to are the ones that have been growing the slowest. Oops. Our top 4 export markets were all in the bottom 12 by growth. The only fast-growing country we exported a significant amount to was the Republic of Ireland: I'm not sure we can count on it growing as fast in the future.

It is heartening to see how our exports to China have grown since 2000 - albeit from a very low base. However, the new trade numbers show us that UK imports from China are growing even faster. The bilateral deficit with China was £22.8bn in the year to December, by far the largest trade gap with any single country.

Optimists like to say that the UK is well placed for the next stage of growth in the Brics: "Of course, German exporters cleaned up when these countries needed German engineers to build their large scale infrastructure," these people say, "but now they've built all their bridges, they're going to need pensions, insurance, high quality education and the like - all areas which play to Britain's strengths."

I hope so. But as Vince Cable would be the first to admit, we have a very long way to go. And so far, the biggest contribution that a weak pound has made to that process has been to make life even harder for the MPC.

If the Bank of England raises interest rates on Thursday, will the pound rise or fall? Thinking about the answer to that question tells you all you need to know about the series of bad choices confronting our central bank.

In normal times, banks raise interest rates to stop inflation, which they expect to result from the economy growing faster than its long-run sustainable rate. A rate hike is thus a sign of economic strength. Assuming other central banks don't raise rates at the same time, you would expect investors to buy sterling in hopes of (relatively) higher returns and faster growth.

As any foreign exchange trader would tell you, the currency market is not always so logical. Currencies can swing wildly, without central banks doing anything at all. But for most advanced economies, most of the time, you can expect relative interest rate expectations to play a large role in determining which currencies go up in any given month, and which go down.

Many in the markets seem to believe the usual rules apply today: the pound has been rising in recent weeks, on the expectation that the Bank's Monetary Policy Committee will have to tighten policy sooner than previously expected - because of continued overshoots in inflation.

But, thinking about what an early interest rate rise would mean, I wonder would that really be a good time to buy sterling? As I said earlier, rate rises tend to be associated with stronger currencies, because rate rises also tend to go with rising incomes and strong(er) economic growth. But that is not the case here: if rates went up on Thursday, it would be in response to price pressures that have squeezed real incomes and might even threaten the recovery. It would be hard to see higher rates as a sign of economic health.

This is brought out clearly in a recent paper by David Bloom and fellow economists at HSBC, which has this to say about an early move by the MPC:

"In our eyes this [would be] akin to the MPC raising rates based on higher taxes. If, of course, we saw nominal wages rise as a result of higher headline inflation that deflated the mountain of debt, this would be positive for the economy, and a rate rise on this basis would be [sterling] positive. However, the days of having huge amounts of unionised workers with pay links to the RPI are well and truly gone....

...The reason the UK had to embark on QE is that the normal transmission mechanism of monetary policy had broken down. To suddenly assume all is well and a rate hike is needed is bad enough but to assume this is positive [for sterling] is a travesty."

So I guess we know who ISN'T buying sterling assets in hopes of an early rate rise from the MPC. But to judge by the increase in the currency's value since the start of the year, plenty of investors are doing just that.

The longer that continues, the more difficult things will be for the Bank.

Though he has rarely been so blunt about it, a key objective for Mervyn King and the Bank in this entire crisis period has been to talk down the value of the pound. True, the large fall in the value of the pound since 2007 has yet to produce much of a bump in Britain's trade figures. But when it comes to re-balancing the economy, a weak pound is more or less the only strategy we have. At least the production side of the economy, which produces most of our exports, is now growing faster than anything else. In that sense, a higher pound could threaten the one part of Britain's recovery which is less reliant on the spending by hard-pressed UK householders.

To judge by (see blog of 26 Jan), the governor is well aware of the economic risks that above-target inflation poses to household incomes and to growth. He is also well aware of the risks of the Bank raising rates too quickly, to bring inflation down. But to those fears we can now add another: the risk that even the suggestion of higher rates will push up the pound.

My strong sense is that most members of the MPC would not welcome a rate rise in the UK any time soon. The Bank needs more currency traders to take the same view.

The Institute for Fiscal Studies thinks the chancellor is right not to start moving to a Plan B. Though borrowing could come in slightly lower than expected this year, says that "having set out his fiscal consolidation plan, it is important that Chancellor George Osborne resist the temptation to engage in any significant net giveaway in the Budget".

"While last week's growth figures were disappointing... any fiscal loosening aimed at helping the economy could be ineffective if it prompts an offsetting monetary tightening, and risks undermining investor confidence..."

On the broad economic outlook, the authors broadly endorse the government and the OBR's position - but with gloomy caveats. They think the downside risks are probably greater than the chancellor suggests. But, depressingly, the authors don't seem to think the government can do much to offset these risks - or mitigate the effects.

For example, they think there is a risk that consumption will disappoint this year - as households respond to declining real pay rates and, amongst other things, falling house prices. And they don't expect companies to rush to the rescue, with big increases in investment, even though - as I have mentioned many times here - many companies are sitting on plenty of cash. Most troubling, they worry that companies could start shedding labour in a serious way in 2011 and 2012, to raise productivity after several years when it has not risen at all.

All or any of these negative shocks could throw the government's borrowing numbers off track - with the Bank of England not necessarily able to respond. In other words - Plan A could be even worse than we think. But there may not be scope for a Plan B. They think there's a roughly 1 in 5 chance of a double dip recession in 2011.

However, the report gives the lie to the suggestion that the government's cuts are similar to the consolidation plans being undertaken by other countries. Out of 29 industrial countries, only Greece is planning a sharper decline in structural borrowing between 2010 and 2015. And only Ireland and Iceland are planning a larger reduction over this period in public spending as a share of GDP.

Update 1140: There is a tension in the IFS report on the vexed question of a Plan B. (Some would say there's the same tension inside the Treasury.)

As the quote I referred to earlier suggests, the IFS and their co-authors believe strongly that the chancellor should not change the fiscal strategy as a result of the recent disappointing growth numbers.

But, in the press conference launching the report, the IFS deputy director, Carl Emmerson, has now made clear that the IFS does think the chancellor needs a Plan B - and he needs to tell us all about it. He needs to explain clearly what he would do, if the economic outlook turned out to be worse than expected.

The folks at IFS and Barclays Wealth do not think that this would be damaging to market confidence - or the chancellor's standing in financial markets. Possibly it would help.

The chancellor seems to disagree - he thinks it's risky to even mention a possible back-up plan. But they can all agree, apparently, that Mr Osborne's credibility would be hit if he was seen to actually tone down his spending plans at only his second Budget.

Many in the government were surprised at their own success last year, in building a political consensus in favour of their budget cuts. Wise heads knew that the mood would shift, when the cuts actually came in. But thanks to one set of bad GDP figures, the ground may be shifting even earlier, and faster, than they thought.

I wrote last week how that first estimate of growth - or the lack of it - put George Osborne and the Prime Minister on the back foot in Davos. By the same token, the new shadow chancellor Ed Balls could not have picked a better week to take over the job. He has - famously - had to revise his position on Alistair Darling's planned deficit cuts (the formulation is tortuous, but that's the gist). But he's still the British politician who has made the most detailed intellectual case against the cuts, in his campaign for the Labour leadership last summer.

The shadow chancellor will feel he has had further reinforcement in the past 24 hours, from the National Institute for Economic and Social Research and from Larry Summers, the economist who has recently stepped down as President Obama's chief economic advisor.

The NIESR this morning slightly lowered their UK growth forecast for 2011 from 1.6% to 1.5%, and the 2012 forecast from 2% to 1.8%. These compare with the official OBR forecasts of 2.1% growth in 2011 and 2.6% in 2012. At the press conference launching its new report, the institute's acting director, Ray Barrell asserted, without qualification, that "fiscal policy is too tight this year". The report itself has this to say:

"There is no doubt that a fiscal consolidation plan should be in place, and we have argued for one both before and after the election. Increasing the national debt transfers resources from our children to us, and leaves us unprepared for the next crisis. However, the debate over the timing and scale of the consolidation is not over. Borrowing is cheap, debt default risks in the UK are low, and there is a significant output gap in the economy. In these circumstances we would argue for a delay in consolidation."

It will be interesting to see how many city economists lower their forecasts in the coming weeks, as a result of last week's GDP figures for the fourth quarter of 2010. If you think the figure is a genuine blip - a freak result of the weather which will be recouped in the next few months - then you're not necessarily going to lower your forecast. Indeed, the percentage growth for 2011 could even go up, if forecasters take the view that the output lost in 2010 will happen in 2011 instead. But if forecasters look through the effects of the snow and see a serious loss of economic momentum, the forecast for 2011 and even 2012 will surely go down.

I suspect many will wait to see the first estimate for growth in the first quarter, before making a definitive judgment either way. Alas, this is not open to the chancellor, who must deliver his budget on 23 March, more than a month before that first quarter figure comes out.

If you heard my interview on the Today programme this morning (0840) you'll know that Larry Summers declined to make any strong predictions about the UK. He stuck to the content-free formulation that he expected markets to "fluctuate". (Similarly, Bob Rubin, when he was US Treasury Secretary, used to say "markets go up, markets go down.) But Summers allowed more content to slip into his assessment of the government's case for rapid budget cuts.

In normal times, he said, it is right to argue - as the government implicitly does - that fiscal policy does not affect the overall amount of activity in an economy, only the division between public sector spending and investment, and private. At such normal times, it is the monetary policy of the central bank that largely dictates the short-term path for growth.

But, he said baldly, these are not normal times. In his view, we are in - or close to - what J M Keynes called a "liquidity trap", in which there is a near infinite demand for liquid assets, and monetary policy is largely ineffective, because interest rates cannot fall any lower, and businesses and consumers want to save, not spend. In these extra-ordinary circumstances, he thinks that the usual rules do not apply, and fiscal policy has to step up to the plate to support demand.

The implication is that the coalition is indeed taking a risk with the recovery, and putting their deficit targets at risk as well. Because, if Summers is right, the private sector may well not come to the economy's rescue: growth will be lower than forecast - and borrowing is likely to be higher.

You might say - who cares what Larry Summers thinks? We all know that the US can get away with borrowing a lot more than the UK can. We also know that Summers is a Democrat, who taught Ed Balls when he was a Professor at Harvard. (I should add, I worked for Summers when he was US Treasury Secretary in the late 1990s.)

But, Summers is no left-wing firebrand. Far from it. Many on the left of his party can't stand his pro-business, pro-market approach. Indeed, many say his zeal in liberalising the US financial markets helped pave the way for the crisis of 2008-9. For most of the time he was Treasury Secretary, the US was running a surplus, not a deficit.

As Summers is the first to admit, the right fiscal strategy for the UK right now is a matter of precise judgment, which he, as an outsider, is not well placed to make. But at the heart of that judgment is the issue he raised in his interview: is this going to be a "normal" recovery? Or has a once-in-a-century financial crisis thrown the usual rules of macroeconomic policy up in the air?

For the moment, the governor of the Bank of England, the Treasury, the OECD, the IMF and, probably, the majority of economic forecasters in the city all believe the usual rules do apply. True, they would argue, we might not be looking at a strong recovery, but that's the price we pay for a long and unsustainable boom, and a massive increase in the amount of public and private debt. Fiscal tightening carries a risk, but continuing to spend and borrow at this rate would be riskier still, and quite likely counterproductive as well.

The likes of Martin Wolf at the FT and the nobel prize winner, Paul Krugman, have stood against this consensus for some time. I mentioned earlier that it would be interesting to see how many economists change their forecasts as a result of last week's figures - particularly if we see other disappointing numbers in the weeks ahead. It will be even more interesting to see how many change their tune on the pace of cuts.