New figures show that the UK economy shrank by 2.4pc in the first quarter of this year. This is a revised number down from the 1.9pc previously reported.

It shows that the UK is in a much worse downturn than many expected and so-called green shoots of recovery are isolated statistical blips.

Many forecasters are now turning away from the much-hyped V-shaped recovery pattern, and even a more leisurely U-shape, to a wobbly “W”, or double-dip delayed type of recovery.

It’s clear the British economy is still in freefall. As in the 1980s, the biggest decline has been in manufacturing. While the public sector has continued to grow, the makers of things have taken blow after blow.

The weakest sectors have been new housebuilding and car making.

This is beginning to look very serious indeed for UK industry and any company in the private sector.

Mervyn King, Governor of the Bank of England has suggested more British banks may have to be nationalized in order to get them lending normally again. The alternative is many years of sub-trend growth.

Here’s the statement:

“The measures taken over the past six months were designed to stabilise the banking system and prevent failure. What’s become apparent is that nobody knows what level of capital they need to hold in order to be willing to make judgements about lending on the same criteria as you would regard as normal… In the long run, the only way to overcome this is for banks to get back to a position where they’re sufficiently well-capitalised that the degree of risk aversion that they exhibit towards their lending practices returns to a more normal level of risk aversion and not the extreme risk aversion which is being exhibited today.

“Higher capital would resolve that. How much capital, we simply don’t know. There was an interesting contribution from Alan Greenspan which suggested that several percentage points extra capital would be needed in American banks over and above the levels that regulators are pushing them to to get them to a more normal lending state.

“What’s very important to distinguish between and to my mind this is the big lesson of the last three, four five months, is that there is quite a big difference in practice between the levels of capital that banks need to be stabilised – in the sense that the creditors are reassured that the banks can continue as viable entities – and the levels required to persuade banks to exhibit normal levels of risk aversion. How big that gap is is absolutely impossible to say. I know of no scientific basis on which you can set that figure, but it looks as if it will be quite big.

“And what that means is that it will take time for the banks to get that extra capital. They are bound to be cautious about the rate at which they expand lending. It is a difficult problem to deal with. If the banks are going to continue as private sector entities they will naturally behave in a risk averse way for a while. That’s one of the lessons of history in terms of balance sheet problems.

“They could put in more public sector capital if they decided to do so but that has to be a judgement for government, and it does have ramifications for the Government’s shareholdings in banks because the amount you’d need to put in would undoubtedly be significant relative to the size of privately owned capital at present, and that does raise a whole series of awkward questions – but that is a matter for the Government.”

Not a nice prognosis and signs that the recent “bull” market and green shoots could all be in vain.

John Evans

Bank of England Deputy Governor, Charles Bean, indicated today that the Bank is moving relentlessly towards the most controversial form of “printing money”, buying gilts, or Treasury bonds.

He spoke in the context of a further adjustment on the downside for GDP this year. The previous forecast was -4 percent. That now has a 75 percent chance of going lower still.

Although the Bank has been tinkering with “quantitative easing”, as it’s known, it was not clear whether it would wheel out the big gun of covering government debt.

Charles Bean also indicated that further cuts in interest rates are likely, falling from the current level of 1 percent to, presumably, the American level of a tiny squeak above zero.

He was said to be relaxed about the fall in sterling and an additional tweaking of rates lower, indicating that the falling pound is not high on the alarm agenda right now.

The BoE believes a further rate cut is necessary before it can begin full-scale quantitative easing.

The International Monetary Fund, as predicted, is now forecasting that British gross domestic product will contract 2.8pc this year, worse than the U.S., the eurozone and Japan.

Last year we reported here on the first use of the “T” word (trillion) for losses across the banking sector. Now we’re into the “2T” word, a graphic indication of how much conditions are deteriorating around the globe.

The IMF expects the US economy to contract 1.6 percent; Japan to shrink 2.6 percent and the eurozone to decline 2 percent. Overall, the IMF expects the global economy to expand 0.5 percent, its weakest showing since the Second World War.

Economists at the IMF also estimated that bank losses may reach $2.2 trillion, almost twice the $1.4 trillion the organization predicted in October.

It warned that, “unless stronger financial strains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth.”

In Britain, the bank bail-out is already projected to take national debt to 8 percent of GDP, and today the Institute Fiscal Studies warned that national debt levels are unlikely to return to the pre-crisis levels for more than 20 years.