Outlook: Recession blues

THE TREASURY is doing its best to convey an impression of calm about the economy even as the pundits veer from euphoria about last week's surprisingly big cut in interest rates to panic about the figures yesterday confirming that manufacturing is in recession for the first time since the early 1990s. Knowing in advance that yesterday's news would be bad, the Treasury had indicated to the Sunday newspapers that the Chancellor saw no need yet to reduce his forecast of 1-1.5 per cent growth.

So who's right about what's happening in the economy, the optimists or the pessimists? While the economy as a whole has slowed down, the chances are that it will still avoid outright recession. Thanks to lower interest rates, last quarter and this are about as bad as it should get, barring a catastrophe in the US or elsewhere. Two quarters of GDP growth around zero certainly count as a soft landing, even if poor old manufacturing industry fares much worse.

On the other hand, the forecast contained in November's pre-Budget report, based on data for September and October, is at the most optimistic end of the range. The economy would have to turn on a sixpence in April for it to come true. While Mr Brown may be a cheerful and upbeat fellow, he has no business basing his Budget on extreme optimism.

On the other hand, the last thing the Chancellor needs in the run up to a Budget that will confirm his determination to set a steady fiscal course is the demand from his colleagues to Do Something about a non-existent recession.

The signs are that the Bank of England will manage to keep it at bay for him. Indeed, the latest grim news from manufacturing could point to a bigger and faster fall in interest rates than most analysts expect. And if that does the trick, the economy could be starting to build up steam by the time the Chancellor is drawing up next year's Budget.