Something happened at the end of August to terrify policymakers

Austerity in the UK is pushing us back into recession, as it is in the eurozone.

So, the latest excuse for what is ailing the British economy is the crisis in the eurozone; it's always somebody else's fault. No longer should we blame the weather or lots of bank holidays or the royal wedding but those pesky Europeans. Of course, it couldn't possibly be the government's policies that have caused the slowing, could it?

More seriously, it isn't as if the government was not warned or that a slowing euro area is actually news. Austerity in the UK is pushing us back into recession, as it is in the eurozone. Plus, we have had a major depreciation of the currency, which should have created jobs and growth through import substitution – as imported goods are more expensive, this should have given a fillip to domestic production. But it hasn't.

Elsewhere, industrial production numbers released by Eurostat on 14 November (see table) showed a 2 per cent fall in the eurozone in
September 2011, compared with August 2011. This represented the largest monthly drop since February 2009, a pretty scary outcome, which suggests that the eurozone in general - and France, Germany and Italy in particular - are headed into recession.

Panic stations

This chimes with the composite leading indicators (CLIs) of the Organisation for Economic Co-operation and Development (OECD), which continue to point to a slowdown in economic activity. Compared to last month's assessment, the CLIs point more strongly to slowdowns in all major economies. The OECD also noted that in Japan, Russia and the US, the CLIs point to slowdowns in growth towards long-term trends.

The Bank of England's Monetary Policy Committee (MPC) is likely to downgrade its growth forecast, even after the £75bn monetary stimulus that it introduced in October is incorporated into its calculations. To me, this suggests that there will be even more quantitative easing (QE) to come.

In addition, the latest unemployment numbers are very bad. The REC/KMPG survey showed that permanent placements fell for the first time in over two years in October. The Labour Market Opinion (LMO) net employment balance score (that is, the overall effect of recruiting new staff and making redundancies) has fallen from -1 per cent to -3 per cent since the summer quarter. This is the second successive quarterly fall and the lowest net balance since last winter. And youth unemployment passed the million mark (reaching 1.02 million) on 16 November, which is likely to create a great deal of public outcry. No amount of spin or fiddling with the statistics - which, to this point, has been the employment minister Chris Grayling's modus operandi - will solve the problem. Apparently, new government measures are on the way but they will take a long time to have any effect.

I have heard from various sources that panic prevails in the corridors of Whitehall, as the search for growth-enhancing measures to announce at the autumn statement on 29 November is not going well. The latest data from the Bank of England, which showed that net lending to British businesses increased by just £0.4bn in the past three months, presumably wouldn't have helped matters. Lending to small and medium-sized businesses was down £1.7bn on the quarter but my sources tell me that the government's plans for credit easing are far from ready to go.
As far as I understand it, the problem is that the government has little planned that could do anything much before 2014. Toll roads and other measures to improve the infrastructure won't have much impact for several years. However, the CBI's idea to give a break in National Insurance contributions of newly hired youngsters is a welcome start.

blanchflower table

Dangers of contagion

Above all, these are very scary days in the financial markets. My guess is that something very serious happened at the end of August and early September that put the frighteners on UK policymakers. In all likelihood, a European bank secretly had to be rescued with an infusion of capital, just as was done for RBS and Lloyds in the autumn of 2008. This would explain the sudden move by the MPC's internal members Paul Fisher, Paul Tucker, Charles Bean, Spencer Dale and Mervyn King to vote for more QE in October; they have seen something, just as they did in October 2008. The apocalyptic language in the statement that the MPC released when they announced QE2 gives us a clue as to how serious the problems are:

Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery.

The MPC has never used the word "threaten" before in any communication. I'm convinced that something happened to scare policymakers. If so, at least the authorities have acted.

The Prime Minister and the Chancellor would have been informed by the governor of the Bank of England, King, on the dangers of contagion to the UK economy. This would explain their sudden conversion to the need to give the IMF more money for bailouts. The break-up of the eurozone would present a major downside risk to UK economic growth and could well be the same order of magnitude as the 2008 downturn - an overall drop in output of 7 per cent or so. Panic reigns.

David Blanchflower is the NS economics editor and professor at Dartmouth College, New Hampshire, and the University of Stirling