Coming back to trade, I think we still should expect some boost to net trade from the devaluation. In the short-term I think it’s completely understandable for exporters to pocket an additional margin. A big part of that has to be the uncertainty at the moment with demand. With the recession still very fresh in exporters’ minds, they have to be wary about increasing production. Plus increasing production can soon run into capacity limits, particularly if capacity has been reduced during the recession either permanently or in ways that are not easily reversible. So if you’re looking at a big investment to ramp up your productive capacity you want to be sure demand is going to be there to deliver a return.

But putting this uncertainty to the side for a moment, isn’t there an opportunity for our exporters to increase their exports through at least some of that devaluation appearing as lower prices? In the longer term aren’t we made more competitive by a structural shift in the exchange rate? And isn’t that what we’re relying on to boost the UK’s recovery and rebalance the economy?

Maybe, but there are several other things we need to consider. For a start the competitive (or not very) situation facing some exporters. If a lot of firms export similar products then chances are at least some might try to take advantage of a devaluation to capture higher market share by offering lower prices than competitors. How many exporting sectors this would apply to though might be questionable, particularly if many produce highly differentiated products with no real substitutes.

I mentioned above uncertainty on demand perhaps discouraging investment but there could be other barriers to expanding capacity. A really topical one at the moment is access to finance. Some of our recent research and discussions suggest, perhaps not surprisingly firms overwhelmingly favour internal finance – retained earnings mainly – to fund expansion. While expansion can be risky meaning debt finance may not be appropriate there are other forms of external finance that might be. Barriers facing particularly our smaller firms in accessing say, new equity, might be one reason why it might take some time to expand capacity.

What about a deterioration in trade finance, possibly particularly important to fast growing developing economies where trade is commercially riskier. Following the onset of the financial crisis, there was a pretty appalling withdrawal of trade finance and I had heard that while it’s coming back, premiums between countries have spread much more than pre-crisis. Could this be limiting the expansion in exports?

None of this is the full explanation and as per the latest official growth outturn (and our own research), exports do now appear to be gathering momentum at last. But it would be interesting to dig more into the significance of each of these factors…

I was on a conference call with a colleague yesterday discussing the state of trade for UK manufacturers. The discussion turned to why the German economy seems to be doing better than the UK. Germany recorded a post-unification high of 2.2% growth q/q in 2010 Q2, largely on the back of a strong exporting performance.

My colleague noted recent comments from the Bank of England’s Charlie Bean that Germany exported more capital goods relative to the UK. Strong Chinese demand for German goods like ventilators, electric motors, fridges, dryers, and cars is a key part of the German export performance. So much so in fact that some commentators have been wondering whether Germany might be becoming too reliant on China given some talk of slowing in the world's second largest economy.

This got me thinking about a number of articles in the media recently about German exports to China, the Chinese economy generally, and whether boosting exports to the Far East is a sustainable strategy for the West to return to solid growth.

So looking a little closer at what’s happened recently, I see that Germany’s surging exports to China, smashed on at an annual growth rate of over 30% . But German exports still focus predominantly on Europe, even more than the UK.

Indeed Germany still exports roughly three quarters of its goods within Europe – far more than the c14% that goes to Asia . So the Chinese story is more about growth of exports. Though it should be noted that exports in June were up 22% on June 2009 for EU countries, so growing well, even if short of the 37% increase to countries outside the EU.

How does this compare to the UK? Well in 2009 the UK sent just 2% of its exports to China , certainly less than Germany’s 4.5%. In terms of growth, exports to China were among the few UK export locations that saw an increase in the 2009/10 year, after trade took a hammering following the financial crisis. Bar 2009, year-on-year growth of exports to China has been in the double digits but no evidence I've seen so far suggesting growth as strong as Germany's. The sorts of things that are exported include medicine, petrol, engines/motors, and cars so not a perfect fit with the Charlie Bean capital goods v consumer goods explanation.

I think there’s more to it.

Why do the Germans seem to have an export-powered growth advantage over the UK at a time when the £ has depreciated by c25%, supposedly making our exports more competitive?

One important comparison to bear in mind is that Germany is simply a bigger exporter than the UK. In 2008 the UK’s exports were worth a bit over quarter of its GDP – but the Germans were 20pp higher, at 47%. In terms of net position, the UK has lately found itself in deficit, whereas the Germans are consistently in surplus - that is, contributing to overall growth.

So in 2009 when the recession shrank the UK and German economies by 4.9%, there was an even bigger drop in trade of 25%. The steeper decline in trade is mirrored now by a steeper rise, as trade in goods in particular trade rebounds. The pattern of growth follows this structural difference. Perhaps the bigger mystery following this logic is not why Germany is growing faster now but why Germany didn't drop further during the recession, as Japan for example did.

Perhaps it's not a question of the UK doing badly at all. It posted 1.1% growth q/q in Q2, better than almost all predictions and better than almost all developed countries (except the Germans of course). Though in our case trade wasn't the engine of growth and it is a puzzle that exports are not growing more strongly, given the depreciation in sterling. This is a puzzle that is both perplexing now and important for the longer term, as many see the expansion of exports as a key part of the rebalancing act the UK economy needs to drive its future growth.

This is a good overall performance, though likely a local peak for growth in the short term. For exports, particularly to places like China, another important difference between the UK and, say, Germany is our higher focus on services - I think that's more important than consumer v capital goods differences. Although we exported 2.4% of our goods to China in 2009, only 1.45% of our services exports went there and within those just 0.5% of our financial services exports and 0.9% of other business service exports. China has a lack of demand for UK service exports.

All this leaves me feeling that more is certainly possible. Apart from our German friends, Europe – our major export location – is growing only weakly. Emerging markets have long been identified as the future for UK exports and yet our presence in places like China is still small. A rebalanced economy needs to see net trade helping drive overall growth – far from the drag it currently represents - and that is going to need higher exports to places like China.

In my view the opportunities from putting more effort into China far outweigh the risks. In the medium term, the outlook for the Chinese economy is very strong.  Growth is forecast to be closer to 10% than 5% for both this year and next. There is external pressure for a revaluation of the yuan  and internal pressure for higher wages. Both of these pressures are likely to lead to higher demand for consumer goods – and potentially services – benefitting the UK. And the terms of trade would tilt to better favour our exports.

I still feel there’s more to understand here. Why aren’t exports growing more strongly and what more could be done? Are there any differences with Germany that we could learn from? When, if ever, are we going to get a proper kick from the sterling depreciation?

Mervyn King and the MPC boys must have a soft hedge around the back of the Bank of England. Otherwise it must be pretty uncomfortable sitting on the fence for 17 months in a row. That’s just been confirmed by today’s announcement that the MPC will leave the official Bank Rate unchanged yet again.

It’s a call we agree with but will still no doubt cause some considerable commentary. That’s because beneath this apparent continuity the swirl of economic signals is becoming ever more complex, making monetary policy setting a tricky business.

Let’s look first at the case for loosening policy even further (which would mean more QE).

The motivation for this might be a belief that growth prospects are weakening, that inflation pressures, like VAT, are temporary, and that the bigger medium term risk is actually deflation. Deflation is bad because it encourages consumers and businesses to hold off spending and investing because their money will be worth more in the future – not what you want if demand is falling.

We know the MPC discussed this in July. What about this month?

The main problem for further easing is concern on inflation expectations. Expectations play a big role in determining actual inflation because of the way they impact on pricing behaviour in the economy e.g. wage demands – I expect inflation to be higher, so I want a higher wage increase than otherwise from my employer.

To keep to its 2% CPI annual increase target, the MPC needs expectations to be anchored. Consistently over-shooting this target undermines this anchoring.

Inflation has now been above target since December. The rise in VAT in January will probably keep inflation above target until the end of 2011 – two years of above-target inflation. That will really test how well anchored expectations are. Will people simply think to themselves “you know what, prices just seem to go up faster these days” and change their behaviour accordingly?

Recent strong manufacturing output growth and upside surprises for the economy generally, while good news, probably further limit the appetite for loosening. Demand could eventually outstrip the (somewhat uncertain) spare capacity of the economy and flow into higher prices. This too would push inflation up.

All this seems to argue against loosening – so what about tightening? (or 'normalising' as the hawks like to say).

We know this too was discussed in July. In fact one MPC member – Andrew Sentance – actually voted to hike Bank Rate and he’s likely to have called again for the song to be changed.

Why? Perhaps based on confidence the recovery is underway coupled with a fear that spare capacity is low and inflation is proving too persistent.

The problem with this view is that it may be too short term. Given long and uncertain lags in inflation and its response to monetary policy, policymakers have to focus on the medium term – roughly 18-24 months ahead.

If anything, since July, medium term prospects for the UK have slightly dimmed. Business and consumer sentiment surveys show domestic confidence waning.

As in July, we know there’s a considerable fiscal consolidation coming down the road. The Coalition will announce the detail of its Spending Review on 20 October.

The source of any upside to growth therefore would appear to have to come from the recovery’s so far disappointing net trade. But is that likely?

Well, recent reports suggest growth in the U.S. and China is moderating. Uncertainty over jobs, fiscal contraction, and a weak housing market are weighing on American consumers. In China growth also appears to be slowing from the first half of the year as the government looks to normalise fiscal and monetary policy (though still likely to top 8% for the year!).

Over in Europe our biggest export market has had a little more mixed news. Continuing weakness in the periphery has been offset somewhat by a stronger-than-expected German performance. But the Europeans, like us, face a looming fiscal consolidation – which for some looks really tough, with lingering sovereign debt fears.

I think the sum of all that makes you hesitate before pushing ahead with any tightening. Higher interest rates could further choke off both investment and consumption just as demand is beginning to slide – a threat to the recovery.

Where does that leave us? Back on the fence of course.

Probably everyone's had a chance to pore over the Committee of European Banking Supervisors' (CEBS') concise(!) summary of the European bank stress tests. But in case you missed it, here's a few thoughts from me.

Great news on Q2 GDP, manufacturing is right at the heart of a building UK recovery. While politicians from both sides are claiming credit for the result, commentators have been quick to hose down expectations, suggesting this may be as good as it gets this year at least.

Before we get carried away we should cast an eye over what's coming over the horizon. Felicity's noted the difficulty of government spending sustaining any support to the recovery - both directly and as a customer for the construction sector (a particular boost to today's figures). There's also a lot of uncertainty coming from our European neighbours. So the second half outlook and beyond is a lot more patchy.

European bank stress tests out tonight could be a key one for further developing a view on European sovereign debt risks. One scenario examined includes some kind of additional sovereign debt shock - the test results may say something about banks' exposure to this kind of risk. Chat on the radio this morning said the tests - and reporting of their results - were a tough one to get right; if the tests fail too many banks, there could be a panic but not enough and they'll be seen as not credible.