Jeremy Warner's Outlook: The economy looks bad, but not nearly as bad as the blundering Government

Market moving business and economic news comes from the oddest of sources these days, and none more unexpected than The Guardian's Weekend magazine, home to lifestyle and celebrity tittle tattle.

What could have possessed Alistair Darling to invite a Guardian feature writer to share his holiday on the Scottish island of Lewis for a "Chancellor bares all" interview is anyone's guess. Plenty of speculation has already flowed over the past few days and I don't want to waste anyone's time adding to the burgeoning weight of it.

One or two things seem worth saying, nonetheless. From my knowledge of the Chancellor, he would not deliberately have intended to stick the boot into Gordon Brown, or to have exaggerated the extent of the economic slowdown. He's only too aware of the dangers of talking ourselves into recession.

I say this despite the fact thatMr Darling plainly fears for his job, and is angered by the prospect of being made the fall guy for economic difficulties and political unpopularity not of his own making.

But he's not the vindictive sort and though it is possible he was attempting to massage expectations of the economy down by painting the picture worse than it really is – there are some big cuts to the Government's economic forecasts to be announced in the forthcoming pre-Budget report – it doesn't to me seem at all likely he was intent on doing the Prime Minister damage. Political naivity, when Mr Darling was in relaxed holiday mood and therefore off guard, rather than deliberate trouble making, seems a more plausible explanation.

Nor in the article's most revealing of comments about the economy does the Chancellor appear to have said what he is widely quoted as saying, or if he did say it, he plainly didn't mean it or has been taken out of context.

In any case, he did not actually say that economic conditions in the UK are the worst in 60 years, nor is it remotely plausible he could have meant this, if only because, for the time being at least, it is obviously untrue. Conditions are plainly not yet nearly as bad as in any of the big three post-war recessions, nor can the Chancellor seriously think they are likely to become so. Technically, we are not yet even in recession. Unemployment has yet to rise to any significant degree. On current evidence, America, the birth place of the credit crunch, might escape recession altogether.

There is as yet no comparison with the searing rise in unemployment and collapse in living standards that accompanied the recessions of the mid-1970s, the early 1980s and the early 1990s.

The remark in The Guardian article which has been made so much of by the press and the politicians doesn't even have the credibility of being a direct quote. Rather it was one of those journalistic fudges where it is not entirely apparent what Mr Darling is referring to.

Did he really say we are facing economic times which are "arguably the worst they've been in 60 years", as the article said, or was he actually referring to the economic challenges, the global economic backdrop, or credit conditions? If any of the latter, then his analysis might have had some validity. But even for a Government in disarray, as the former, it makes no sense.

Still, this is politics, and whatever Mr Darling said or meant, the damage is now done. Few holiday escapades can have backfired so spectacularly. The pound again took a battering yesterday, falling to its lowest level against the euro since the single currency was launched, and triggering accusations that Mr Darling is guilty of that most serious of crimes for a Chancellor, causing a collapse in confidence. Few outside observers think the doves will prevail at this week's meeting of the Bank of England's Monetary Policy Committee by forcing an immediate cut in interest rates.

But if not this month, then certainly within the next two with rates falling to possibly as low as 3.5 per cent in 12 months' time. A small fiscal boost is about to arrive as a result of the Government's U-turn over the 10p income tax rate. It's not to be sneezed at, but nor is it big enough to make much of a difference, either economically or politically.

There are few things the UK economy has got going for it right now. Highly exposed to the housing and financial services sectors, both of which are already in recession, in many respects it looks worse placed than almost anywhere else to weather the present cocktail of negatives. What's more, the Government has no capacity to spend its way out of the downturn, as it did last time around during the contraction of 2001/03. There's nothing left in the fiscal cannon. However much they blame outside forces for current economic woes, ministers cannot escape this fundamental criticism of policy. The Government failed to save, as it should have done, for a rainy day, and is now stuck with the consequences.

Still, things might have been worse. One thing the UK economy has got going for it is its flexible labour market, one of the big pluses bestowed on it by the Thatcher years and built on by New Labour thanks to its open doors immigration policy to EU accession nations and its embrace of globalisation.

Eastern European labour migration helped keep the lid on wage inflation during the boom years and is now acting as a pressure valve in the opposite direction as hundreds of thousands fall out of the UK labour market, but without, as has happened in previous downturns, adding significantly to unemployment or social security costs.

The unemployed are on the whole going home rather than signing on. The steady depreciation in the pound, though painful for the holidaymaker's pocket, will also help stave off the worst consequences of the downturn, as dollar weakness already has in the United States. Without these safety valves, economic conditions in the UK would indeed look grave, if not even then the worst we have seen in 60 years.

Commerzbank axes once proud City name

As if things were not already bad enough in the City, along comes Commerzbank to take the axe to most of what remains of what was once one of its proudest names – Kleinwort Benson. Kleinwort's has never been happy under German ownership. Many of the bank's most talented and well-connected corporate financiers quit after it was taken over by Dresdner in the mid-1990s, including the chairman, Simon Robertson, who tried as hard as he could but was eventually unable to take what the Germans were doing to his bank a moment longer.

This turned out to be quite fortuitous for him, as he subsequently became a senior partner of Goldman Sachs, which enriched him beyond the dreams of avarice when it converted to public ownership. Even so, it's hard to watch as the original home is left to go to wrack and ruin. The process became even worse after Allianz acquired Dresdner. In recent years Dresdner Kleinwort has become seriously sub-scale in investment banking terms.

Commerzbank seems intent on giving up the game almost entirely. The primary interest in acquiring Dresdner is the consolidation of German retail branch networks it will allow, but the premium being paid has to be justified somehow or other, so the investment bank, too, will lose a third of its staff, including more than half of the 2,000 employed in the City.

Proprietary trading looks set to be axed entirely. This will save capital, but in other respects looks something of a zero-sum game, as Dresdner will probably lose as much revenue by closing businesses as it saves in costs.

The name Kleinwort Benson is already as good as gone, with the investment bank rebranded Dresdner Kleinwort a number of years ago. Now it is to be subsumed entirely into Commerzbank and will in time lose its City HQ. Of the myriad of big City names that existed at the time of Big Bang in the mid-1980s, only Rothschild and Lazard remain.

Even the name of Cazenove is now disguised behind that of JP Morgan. The dogs bark and the caravan moves on. By the time the credit crunch is done, the City will again have been changed beyond recognition, both structurally and institutionally. The process has only just begun.

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