Many feel that the recession is ‘payback’ for the country’s past excesses – that we racked up huge debts, spent too much and we’re now paying for it.

It’s true that household debt soared in the past decade and the proportion of debt to income in the UK is among the worlds highest, but this wasn’t due to a surge in household consumption. Household spending, on average, didn’t rise any faster in the pre-crisis period than in the previous 40 years, if anything it slowed, as the graph shows.  Retail sales, however, surged by 35% since the beginning of the decade, this was partly financed through unsecured borrowing. Until, that is, the credit crunch brought this type of lending to a halt.

Week in Review

Week in Review  

It seems even the most experienced, distinguished economists can't agree.

I went to a debate this morning on the impact of QE and what the MPC's next moves should be. On the panel were ex-MPC members Sushil Wadhwani and Charles Goodhart and Alessandro Rossili, the former Chief UK Representative of the Bank of Italy.

While Wadhwani argued the MPC should pause the QE programme to "avoid fanning the flames of irrational fears of inflation", Goodhart felt as long as the programme can be reversed quickly, "why not?" expand purchases? In fact, he suggested expanding the programme by another £50bn over the next three months (the BoE currently has permission for a further £25bn of purchases and would have to ask the Chancellor to authorize any purchases above this limit).

In a Who Wants To Be A Millionaire? style survey, the room was asked to 'vote now' on whether we thought the MPC should halt, pause or expand QE.

8% said halt
45% said pause
47% said expand

So not really a clear response then...

We were also asked whether we felt the greater risk to the economy (in the medium term) was inflation or deflation. Can you guess what the responses were?

Not quite 50/50, but 51% said inflation and 49% deflation.

Economists being polled by Reuters were just as torn as 50% expected the MPC to pause and 50% expected an extension.

It seems in this uncertain economic climate we really can't make up our minds...

Our Director of Policy and Chief Economist Steve Radley was asked by Reuters to write an article on manufacturing and the role of economic policy.

You can read about how the 'Government must act on bold promises to UK manufacturers' here.

Today's PMI numbers show manufacturing activity stopped plummeting and returned to growth in July.

The index crossed the all-important 50 mark (which indicates expansionary activity) for the first time since March 2008, rising to 50.8.

Our Chief Economist Stephen Radley commented on today's figures:-

The rebound in manufacturing activity, from extremely low levels earlier in the year, has to be good news and the pick up in new orders is particularly encouraging.  Most manufacturing indicators now seem to be moving in the right direction, so the second half of this year should be notably better than the first half.  However, a lot of uncertainty still remains and manufacturers are likely to be cautious about calling an end to the downturn.

The news sent the pound to a 10-month high against the dollar.

We wait to see if the survey has any impact on the MPC's decision to extend its QE programme on Thursday...

The US economy contracted at an annualised rate of 1.0% in the second quarter, figures from the BEA have shown. 

The BEA also revised down the first-quarter GDP figure to -6.4% - the largest decline since 1982. It was previously estimated as -5.5%. 

Consumer spending, which accounts for two-thirds of US GDP, fell by 1.2%, after rising by 0.6% in 2009q1. Also weighing on overall GDP was the record fall in inventories, as firms shed $141bn of stock, compared with $114bn in the first quarter.

Partially offsetting these negative effects was higher government spending which increased almost threefold in the second quarter. Lower import volumes and smaller declines in business and residential investment also moderated the slowdown. 

Although it is widely expected the US will return to growth by the end of the year, any recovery is likely to be weak. The relatively weak dollar will continue to help the competitiveness of US exports but, without a pick up in global demand, the impact on growth from trade will be muted.

It is unlikely that consumer spending will contribute significantly to growth either. Consumer confidence is already at historic lows and has fallen in the past three months. 

Rising unemployment, which is not expected to peak until next year, will drag consumer spending down further.

This week:

For more info check out our weekly Economic Update

We all know that the UK's public sector finances are in a dire state and today's figures only confirmed that view.

Although the figures were better than expected, David Smith points out,  

"These things are relative, of course, there was a current budget deficit of £9.9 billion last month, compared with £5.8 billion a year earlier, and net borrowing of £13 billion, up from £7.5 billion. Public sector net debt has risen to 56.6% of gross domestic product and the old 40% ceiling seems like a distant memory."

Barclays puts this in the context of previous years:

"Today’s outturn takes this year’s PSNB [Public Sector Net Borrowing] 24% of the way to HMT’s forecast of £175bn in 2009-10; this is just below where it was last June (25%) or where it has been on average over the previous 5 years (37%)."

Growing concern about the state of the UK's public finances weighed on Sterling, as the pound fell 0.8% lower against both the dollar and the euro.

The UK car scrapping scheme seems to be working, giving a much-needed boost in the industry. The latest figures show car registrations were 7% higher in June than in May (when accounting for seasonal adjustments), and, according to the SMMT, almost 10% of new car registrations were as a result of the scrappage scheme. 

Government figures show that within a month of introducing the scheme, almost a fifth of government money has already been spent, raising concerns that the scheme will be exhausted before its proposed closing date in March.

For now, the scheme is helping the beleaguered automotive industry. But it remains to be seen if higher demand will be sustained once the stimulus is removed. Until consumer confidence picks up a sustained recovery seems unlikely.