By Hamish McRae

We are still in the early stages of the downturn but we can - in a funny way - see more about the policy response to it than we can about its scale and shape. It is clear that there will be further cuts in interest rates and the PBR next Monday will give us an idea of scale the fiscal stimulus. This has to be done - and I have sketched some concerns about it in the column today.  But we are still very much flying blind about the scale of the problem. My main concern is that if too much ammunition is used up now there won't be much left if the downturn proves prolonged. At the moment the received wisdom is that recovery gets going in the second half of 2009. I am not sure it can really do so until the housing market turns and that may be further away. Brighter note: even the more gloomy forecasts suggest that the recession will not be much more serious than the earlier 1990s and hence not nearly as serious as either the 1970s or the early 1980s. We need a bit of such comfort right now.

By Hamish McRae

The fall in the pound was given a new kick downwards by the Bank of England's Inflation Report, and is now as sharp was the decline after sterling was ejected from the ERM in 1992. It could be seen as a vote against the Bank and the Treasury - sterling not so trusted now as it was even six months ago - and it will be miserable for UK tourists abroad. But in 1992 it was Britain's "get out of jail" card, enabling it to establish the conditions for the  long boom -  from which the present government has benefited.  It don't do much for the reputation of the Major government, though, and that may hang over this one too.

By Hamish McRae
in Tokyo

Sounds a lot, doesn't it? The Bank of England estimate that the total losses of the world's banks could reach £1.8 trillion is the highest official number I have seen yet and is, and should be, shocking. But you have to put it into the context of the world economy. On my back-of-an-envelope tally this is about 7 per cent of world GDP - I can't do it precisely because I don't know what exchange rates the Bank has used. If that is right, it would be of course in absolute terms by far the worst banking losses the world has ever known. But in relative terms it looks more manageable. It is a lot smaller than the losses incured by Thai banks in the 1990s relative to Thailand's GDP and perhaps half of the losses of Japanese banks in the 1990s, again relative to GDP.

That is some comfort, through I happen to be in Tokyo at the moment and can report that the aftermath of its banking crash still lingers. Japan has had two decades of near-stagnation. The trouble is that this one is global, not just confined to one country, albeit the second largest economy. Japan matters because the other way of looking at it is to say that the world is losing the equivalent of nearly two years of natural growth. Providing groath restarts that is bearable. It didn't in Japan, so the policy-makers have to try and figure out why and do better this time.

By Hamish McRae

There are two immediate and obvious lessons from the huge public sector recapitalisation of UK banks and the associated flooding of the money markets with liquidity by the world's central banks. One is that all official efforts so far to assert authority over the financial markets  have failed. The second is that the world's governments and central banks can and will go on until they succeed. This will continue to be messy, for there is no good way of stopping a financial panic - better not to let it happen in the first place -  but it does not need to be done well. It needs to be done well enough.

These initiatives - there will be more around the world - will continue for some weeks, maybe longer. There will be some continuing damage to the world economy, making a early-1990s style recession more likely. And because credit will be tight for some years, the pull out of this decline will be slow. Given this, though the markets will recover, expect them will be sombre places for some while yet.

By Hamish McRae

Yes, but what about the real economy? If I have been too optimistic about the effectiveness of the world's monetary authorities in restoring faith in the banking system, might I also have been too optimistic about the now-incipient economic downturn?

By Hamish McRae

Short-term or long-term? The immediate issue, of course, is the way or ways in which the various national authorities will support their banking systems - but ultimately the more important matter will be the effect banking stress has on the real economy. Because the rebuilding of trust in banking has been botched, the recovery of the banking system will be slower that it need be. As a result most of the developed world will experience recession.

That, I am afraid, is a done deal. So the next issue is how long and how deep those recessions may be. That is still very much to play for, but it creates a political difficulty. If voters want the banks to be punished this will inhibit the recovery and increase the pain they inflict upon themselves. It is not an easy "sell", as politicians everywhere have found.

By Hamish McRae

The financial markets are now in high terror mode - the classic signal of a turning point. The fall-out will continue and there may well be more rescues/collapses of large financial companies; indeed it would be surprising were there not. But market chaos does not continue at this intensity for very long, so the question will be the path of convalescence and the impact on the real economy of the world.

It is possible to be fairly positive about the former. The thing I find encouraging is not that the share market have declined sharply around the world but rather that the falls have not been larger. My much greater concern is the shape of the world economy next year and the year after. Capital will be scarce as banks will be scared and capital markets cautious. That caution has extended to China and is extending to India. The fall in the oil price suggests that that market at least thinks global demand for its product will decline - not quite a predictor of global recession but certainly one of much slower world growth.

By Hamish McRae

My suggestion last week that the credit crisis has reached a turning point was at least four days premature.

The events in New York on Sunday really must be the turning point as far as financial market disruption is concerned, because if they are not, the problems of the markets will start to do grave damage to the world economy. There will be some damage, of course, with the direct effect on London's economy as well as New York's. There are a lot of job losses as well as a shock to other people in financial services. But the indirect damage is potentially more troubling.

By Hamish McRae

The OECD forecast of a recession in the UK in the second half of the year came as a shock, and not just because this was a worse prospect that for any of the G7 and vastly worse that the Treasury forecast. It was a shock because it was much worse than any previous official forecast, including that of the Bank of England, and worse than almost all of the private sector ones too.

The OECD is excellent and Jorgen Elmeskov, who is in charge of these forecasts, is very level-headed and sensible. But while of course this may well turn out to be right, my instinct is that it is too gloomy.

By Hamish McRae

Not the greatest time to go on holiday, at least as far as sterling is concerned. The pound has had a devaluation almost as large as the fall in 1992 after it was ejected from the ERM. The fall has come in two stages, first against the euro, now in the past fortnight against the dollar. But if it is disagreeable to have to be more careful with money when on holiday, at least the fall has come at a better time than in 1992.

Then it was in the depths of the global recession, but this time is before the downturn has really taken hold - I have tried to look further at this in the Sunday column. And we can see from the eurozone's move into negative growth in the second quarter, how an over-strong currency clobbers demand. Is the decline broadly over? Not clear; but the market is pricing in a gradual recovery over the next few months - though not in time for this holiday season.