The OECD says the loss of momentum in the recovery is temporary although uncertainty has increased. “The uncertainty is caused by a combination of both positive and negative factors,” said OECD Chief Economist Pier Carlo Padoan. “But it is unlikely that we are heading into another downturn.”

While consumer spending is set to remain weak, a combination of robust corporate profits and low business investment suggest that capital spending is unlikely to weaken further. Because inventories are now close to desired levels, a renewed depletion of stocks is also unlikely. Overall financial conditions have stabilised, the report notes, and growth remains strong in the major emerging-market economies.

Based on the most recent data, the OECD short-term forecasting models show that US GDP is expected to rise by 2.0% in the third quarter but then moderate to 1.2% in the fourth quarter of 2010. In Japan, GDP growth is forecast at 0.7% in the fourth quarter after 0.6% in the third.  As can be seen in the diagram below, UK growth is expected to be 2.7% in the 3^rd quarter and 1.5% in the fourth.

This is quite surprising as the National Institute of Economic and Social Research (NIESR) has just said that GDP in the three months to August slowed sharply to 0.7% , compared to 1.3% in the three months to July.

According to the NIESR report, “The pace of economic growth may have softened in the three months to August, but is still a robust rate for the UK.” But it went on to say: “Unfortunately, the rate of growth will continue to decelerate over the coming months.”

Mr Padoan, of the OECD also said that the current stance of both fiscal and monetary policy should remain on course. If the slowdown in the recovery becomes entrenched, and the risk of downturn increases, additional monetary stimulus in the form of quantitative easing and keeping interest rates close to zero for a longer period may be necessary. Countries with more fiscal space could also delay plans for fiscal consolidation.

In fact, the Monetary Policy Committee of the Bank of England decided today that interest rates will remain at their record low of 0.5% for the 18^th consecutive month. There was no change to the total of quantitative easing but some commentators feel that the £200bn limit is about to be increased over the next couple of months.

Of course this is an average figure, with huge variations between countries. The proportion was less than 1% in Poland, Romania and Bulgaria but 44% in Luxembourg.

In terms of the raw data, the most foreign citizens are to be found in Germany with 7.2 million; Spain, 5.7 million; UK, 4 million in 2008; Italy, 3.9 million; and, France, 3.7 million. Over three-quarters of all foreign citizens lived in these five countries.

Among the EU27 Member States, the highest percentage of foreign citizens in the population was found in Luxembourg (44% of total population), followed by Latvia (18%), Cyprus and Estonia (both 16%), Spain (12%) and Ireland (11%).

In 2009, 37% of the foreign citizens living in the EU27 were citizens of another EU member state. The largest groups were from Romania (2.0 million or 6% of the total number of foreign citizens in the EU27), Poland (1.5 million or 5%), Italy (1.3 million or 4%) and Portugal (1.0 million or 3%). The largest groups from outside the EU27, came from Turkey (2.4 million or 8%0, Morocco (1.8 million or 6%) and Albania (1.0 million or 3%).

What was particularly interesting from the findings was that foreign citizens were significantly younger than the population of nationals, having a median age of 34.3 years compared with 41.2 years. This certainly adds a ‘vitality’ to many populations from foreigners living amongst them.

The third quarter EEF/BDO ‘Manufacturing Outlook’ report reveals that recovery, which began at the end of last year, has been sustained with output and orders balances reaching record levels for the second quarter in succession. This performance continues to be driven by the strength of overseas markets, with new analysis published by EEF showing a close relationship between exposure to export markets and company performance.

Greater confidence across the sector is also continuing to translate into some recruitment, albeit anecdotally this is being driven by temporary or agency working which will give employers flexibility should demand begin to slow.

Uncertainty about future demand had been dampening investment plans, but a number of sectors are now planning to increase in investment. The positive investment intentions posted this quarter breaks the pattern of previous recessions by recovering at an earlier stage in the cycle.

However, the short-term optimism highlighted by EEF’s survey is shaded with a degree of caution about the risks to growth in 2011. As fiscal consolidation really gets underway in the UK and others follow suit, together with the weaker outlook for the US and risks to the sustainability of Asia’s growth path, the recovery could yet falter.

Commenting, EEF Chief Economist, Ms Lee Hopley, said:

“Manufacturers have continued to reap the rewards of growth in overseas markets with the upswing being felt across all sectors and regions. Not only has this continued to translate into better employment prospects but the recovery in investment has begun much earlier in the cycle than after previous recessions.

“However, we have to maintain perspective that the recovery is coming from a very low base and the risks to the economy in the medium term haven’t gone away. The rebound in exports and modest improvement in investment will need to become much more firmly entrenched if we are to see a much-needed rebalancing of the economy.”

Manufacturing buoyancy has been fuelled by a strong rise in exports.

Tom Lawton, Head of Manufacturing, BDO LLP, comments,

“The sector has seen a significant upturn since the dark days of the recession and this quarter’s results show continued growth in output and orders and more expected for the next quarter, mostly driven by the restocking across most sectors of industry and exports.

“This quarter results show more optimism around two key indicators which have been lagging behind the general good news of the sector in recent surveys, being employment and investment. This is excellent news but much more will be needed to enable manufacturing to compete in the space where we have a competitive advantage – innovation, research and development, excellent customer service and fast response to emerging trends.”

Over the last three months, output and new order balances were +33% and +35% respectively, both record levels since the survey began in 1995 which suggests growth in manufacturing output should at least continue into the next quarter.

This growth has been driven largely by export markets (+30%), where Europe in particular turned out to be stronger than expected. Whilst the domestic order balance weakened slightly, the balance of +20% is still above its long term average. Furthermore, growth continued to be broad based across all regions and sectors.

The survey was also notable for two other factors. Firstly, the balance of companies recruiting almost doubled in the last three months to +17%, the strongest in the survey’s history.

Secondly, the investment balance turned positive to +7% for the first time since 2008q2. Compared with previous recessions, where investment balances have tended to lag behind increases in output by over a year, this is a somewhat faster recovery in capital expenditure intentions and signals that companies are becoming more confident to begin investing in plant and machinery.

Looking forward, expectations about future prospects remain positive, with a balance of 27% of companies expecting output to increase in the next three months, and 22% expecting orders to expand. Both of these balances are higher than the previous quarter’s figures suggesting there is confidence that the recovery will continue into the next quarter at least.

EEF also published its latest forecasts for the UK economy and manufacturing. These show the economy growing by 1.5% and 2.1% in 2010 and 2011 respectively whilst manufacturing will grow by 3.7% in 2010 before easing back slightly to 3.2% in 2011.

GDP growth was 1.1% in the United Kingdom, up from 0.3% in the previous quarter; 0.6% in France, up from 0.2%; and 0.4% in Italy, unchanged from the previous quarter.

* second quarter not available Source: OECD

By contrast, GDP growth in Japan and the United States slowed to 0.1% and 0.6% respectively, compared with 1.1% and 0.9% in the previous quarter.

Relative to a year earlier, GDP in the OECD area expanded by 2.8%, up from 2.4% in the previous quarter. Germany at 3.7% had the highest rate and Italy (1.1%) the lowest.

Personally I would hate to be seen as normal, but there is something quite reassuring about having that name applied to the economy. However, we are not going to see ‘normal’ again for years in the UK.

The Bank downgraded their forecast for economic growth next year from 3.5% which was in their May report, to 3% in the current report. Mr King said: “The UK recovery is likely to continue, but the overall outlook is weaker than that presented in the May Report, reflecting the softening in confidence, the persistence of tight credit conditions and the faster fiscal consolidation.”

However, there is a big gap between the forecasts made by the Office for Budget Responsibility (OBR) and the Bank. The OBR has forecast growth of 2.3% for 2011 and 2.8% in 2012. In fact the general agreement in the City is more with the OBR forecast.

What does the Bank see as the downsides to growth? It is felt that the lack of bank lending will limit growth and it is expected that it will take many years for bank balance sheets and fiscal positions to return to anything like normal.

On the plus side was the fall in the value of the pound and the continuing effect of the economic stimulus.

As far as inflation is concerned, the Bank expects CPI, currently at 3.2%, to remain over its 2% target until the end of 2011. This is because the effect of the increase in VAT from 17.5% to 20% from next January will drop out of the price comparisons twelve months later.

Mr King thought that continued inflation above target would not raise inflationary expectations and that there would not be a response of higher wages causing an inflationary spiral. He backed this up by pointing to the slack in the labour market which has an extra million people out of work compared to pre-crisis figures, which is causing downward pressure on pay.

In the meantime we will have to tighten our belts. Not only metaphorically, but literally too for far too many people.

In the article he looks at the eight millennium development goals and how close we are to achieving them.

He writes: “When world leaders meet in New York in September they will laud the progress that has been made on the Millenium Development Goals, note somberly that much more needs to be done and then promise to do more before 2015 to get them ‘back on track’.

Meanwhile developed countries are slashing government spending and there are still 1.4 billion people living below the $1.25-a-day global poverty line.

 You can access the article here.

They were taken to task for figures which seemed to overstate the relationship, which had given ammunition to some commentators who are in favour of severe cutbacks in government expenditure.

Below is the statement from Dean Baker, co-director of the Center for Economic Policy and Research in Washington, which had earlier published a policy paper on what they considered to be a major error. It is worth reading the policy paper and there is a link in the text below.

“The Congressional Budget Office (CBO) is widely regarded as an impartial source of sound economic and policy analysis. Both parties have come to look to the economists and analysts at the CBO for projections and forecasts devoid of a partisan agenda. Therefore, it is reassuring that when errors were found in the latest Long-Term Budget Outlook released on June, 30, 2010, the CBO promptly issued a revised version correcting these mistakes. 

“The issue in question concerns the impact of deficits and debt on private investment. As discussed in a recent issue brief from the Center for Economic and Policy Research (CEPR), the CBO’s report suggested that projected deficits would greatly reduce private investment and lower GDP. Advocates of prompt deficit reduction had already seized on these erroneous projections to advance their agenda.

The revision to the Long-Term Budget Outlook shows that the effects of crowding out are significantly smaller than in the projections released in June. As well, the revision includes the effects of crowding out on GNP, also discussed in the CEPR issue brief.

“By acting quickly and revising the June projections, CBO has demonstrated that the agency is committed to careful and thorough analysis.”

Although securities dealers contributed £1.4bn, fund managers £2.9bn and professional services £6.4bn, banks were by far the biggest contributor. The banking sector recorded net exports of £31.0bn in 2009, down from £25.3bn in 2008.

These figures are really important because the £41.8bn in net export earnings from the UK financial sector is helping to offset the £82bn trade deficit in goods. And, the banks’ contribution is nearly three-quarters of the financial sector surplus account.

So, love them or hate them, the banks are important to the UK economy. This means that the government is having to tread warily in its dealings with banks and has not yet introduced any financial reforms. Basically, they have asked the banks to act in a grown-up and honourable fashion, when the investment arms seem to be run by risk-taking, overgrown kids, intent on creating the biggest bonus they can. It’s like the children running the school.

Just this week HSBC has announced that it is putting $2.52bn (£1.6bn) into a piggy bank for the first six months of its financial year, to hand on to its investment banking arm. This is up $300m on last year even though the bank’s operating income has dropped by $10.3bn. HSBC is not alone in its desire to keep bonuses buoyant.

Just two years ago UBS put a stop on bonuses which almost led to the collapse of its investment bank, as bankers went elsewhere to where the grass was greener. So, unilateral action taken by a single bank has been seen not to work. This then begs the question, supposing the government, as has been threatened, caps all UK bonuses. Does this mean that we will have an emigration flood to Frankfurt, New York and Tokyo as bankers seek more lucrative employment in a less regulated market.

This is a dangerous game of ‘call my bluff’ which the government cannot afford to lose, given the earning power of the financial sector. The banks are still in the mindset of taking mega risks, for mega profits to supply themselves with mega bonuses. The knowledge that the government will act as lender of last resort, as in the recent banking crisis, and bail them out of their own indiscretions, is not going to help.

The government has got to draw a fine line between giving the ‘golden goose’ a good slapping and killing it altogether.

October 2009 marked a turning point in demand, according to analysis published today by the Association of Train Operating Companies (ATOC). During the first half of 2010, there were 681 million passenger journeys, compared with 648 million during the first half of 2009. This meant that there was an overall rise of 5.1%.

Not only that, the rate of increase is rising as well. In the first quarter of 2010 growth was 4.4%, and rose to 6.1% in the second quarter.

Demand for rail travel is expected to double in the next 20 years.

Also, demand grew in all sectors. Long distance travel growth was up 7% in Q1 and 7.7% in Q2. Regional growth was up 1.8% and 6.2% in the respective quarters, and London and the south-east saw growth rise by 5.1% and 5.9%.

Over a billion journeys are made on the railways each year, which is a rise of 60% since privatisation in the mid 1990s. Overall demand is now expected to double over the next 20 years.

The bad news is that you have to have a job in the first place. Unlike the 2.47 million who are currently unemployed in the UK. We should also not forget the 1.08 million who have to take part-time work because they cannot find any full-time employment.

Charities and organisations that have been fighting against “age discrimination” are obviously delighted at the news, as are many older workers who don’t want to end up on the ‘scrap heap’ at age 65.

Although the government will be highlighting this “anti-discrimination” argument, it will have the underlying reason that this move makes economic sense. With a steadily ageing population the demands on the public finances are immense, for support, pensions and health care. With more people being able to work longer, and finance themselves more easily, there will be fewer costs to the exchequer.

Not only that, there will also be more people paying taxes at the same time as they are receiving their state pension, which will boost the economy as well as government finances. The ‘grey pound’ is already a growing part of consumer expenditure and is now set to become even more so.

On the down side, it could be argued that there will be fewer opportunities for younger people to obtain jobs if fewer people are retiring. Some employers feel that the change may add to their costs and that it will make workforce planning more difficult, not knowing the date at which older people will terminate their employment. Some also put the argument that older workers are less productive although there is no evidence to back this assertion. In fact some companies have been deliberately targeting older workers who they feel offer a better interface with customers, than those who are just out of school.