IMAGINE, for a moment, you are a member of the Bank of England’s monetary policy committee (MPC). If you are Mervyn King, the governor, you have been reappointed for a second five-year term, with plenty of time to make good the recent damage to the Bank’s reputation. If you are Andrew “uber-hawk” Sentance, another MPC member, you have also been reappointed. So what do you do?

You start, as the Bank always does, by looking at the global economy. There has been a lot of nonsense talked about world recession, given that we are coming out of a period in which we have enjoyed four years of near-5% annual growth, the best for three-and-a-half decades.

True, America slowed to a crawl in the final quarter of last year, its economy expanding at an annual rate of only 0.6%. Hence the nearest thing you will see in central banking to a red alert: the Federal Reserve cutting US interest rates twice, by a combined 1.25 percentage points, in eight days.

But China, India and other emerging economies are growing rapidly and likely to continue to do so. The most significant thing in China last year was that consumer spending, rather than exports and investment, made the biggest contribution to growth, with retail sales up 17%. The American slow- down will nudge China’s growth down but still leave it at about 10%.

America’s gross domestic product, $13.8 trillion, was four times the size of China’s, $3.4 trillion, last year. But even on this basis, China’s economic growth of 11.4% made a bigger contribution to the world than America’s 2.2%.

When the numbers are adjusted for relative prices, so-called purchasing power parity, as they should be, China is 45% of the size of the American economy, and 10% of the world. So last year just under a quarter of global growth came from China. This, the year of the Beijing Olympics, will again see the biggest contribution coming from China, notwithstanding the severe winter snows.

Add in India, Opec, Russia and Brazil, and well over half of global growth this year will come from outside the G7. If you are sitting on the MPC, then, you will be reasonably reassured that growth is not collapsing. The International Monetary Fund’s new forecast, of 4.1% global growth this year, is down on last year’s 4.9% but still strong. Between 1998 and 2003, for example, global growth averaged only 3.3% a year.

You would not, however, be too reassured. Just as it is possible to have the wrong kind of snow, it is possible to have the wrong kind of global growth. Britain’s economy is not as tied in to growth in China, India and other booming economies as it should be. The slowdown in America and Europe, with the IMF predicting 2008 growth of 1.5% and 1.6% respectively, will have a significant negative impact, only partly offset by what is happening elsewhere.

What about closer to home? Growth in the final quarter of 2007, 0.6% (actual, not annualised), was close to trend. It is slowing, not collapsing, but will soon be growing below trend.

Mortgage approvals in December, 73,000, were below the lowest point in the 2004-5 housing pause and point to further housing weakness, though the Nationwide reported a fall of only 0.1% in prices in January and thinks it has detected tentative signs that demand may be bottoming out.

Consumers, however, are cautious and so is business. The CBI said January retail trading was the weakest for 15 months. Consumer confidence did not improve as much as it normally does between December and January, and remains weak.

There is a lesson for Britain on the other side of the Atlantic and it is that economic weakness can spread and become cumulative in its impact. The MPC would never want to get into the position in which the Fed has found itself, having to deliver panic rate cuts to steady the ship. This reinforces the argument for pre-emptive action.

In circumstances like these, the Bank could normally look down the road to the Treasury for a bit of help. Gordon Brown used to bore on about monetary and fiscal policy operating hand in hand, in a complementary way. No longer.

I have been accused of being too kind to Brown’s chancellorship, though not by Downing Street. On the public finances, however, I have long been critical. Exactly a year ago, I wrote of “Brown’s imprudent tax-and-spend legacy”. Other countries had reduced their budget deficits in the good times but not Britain and, as I put it: “If the economy hits the rocks, the public finances do not look robust enough to take it.”

Those chickens are coming home to roost. The Institute for Fiscal Studies (IFS), in its annual green budget — the real one will be on March 12 — predicts government borrowing will top £40 billion both this year and the following two years. In the absence of at least £8 billion of tax rises, Alistair Darling, the chancellor, will break both the government’s fiscal rules, it said, including the sustainable-investment rule that requires government debt over the cycle to be below 40% of gross domestic product. That, by the way, is excluding Northern Rock.

Governments have raised taxes in difficult times, the classic being Sir Geoffrey Howe’s austerity budget of 1981. The IFS does not think this one will, though it would like to see a nod in the direction of a fiscal tightening. I would argue that Darling has no choice but to let the deficit run above-target and hope for something — the economy and tax receipts — to turn up.

The fact is that there are no shots in the fiscal locker, all of them having been squandered by Brown. The Bank is on its own.

So that means lower rates, and the overwhelmingly expected quarter-point rate cut this week. A bigger cut would look risky at a time when, according to the latest Citigroup-YouGov survey, the public’s inflation expectations for the next 12 months have jumped from 2.7% to 3.3%, buoyed by rising food and energy prices, well above the 2% official target.

Cutting rates is not the “no brainer” for the Bank that it is for the Fed. The “shadow” MPC, which meets under the auspices of the Institute of Economic Affairs, votes only 5-4 for a cut this week, showing there is still a debate to be had. One cutter, Peter Warburton, thinks the Bank should slash by half a point, but the other four were content with a quarter. The non-cutters are concerned about strong money-supply growth, the balance-of-payments deficit, sterling’s fall late last year and the “lax” fiscal background.

There will be some on the actual MPC who agree with these worries, including possibly King and Sentance. Each rate cut in the coming months will be the monetary-policy equivalent of pulling teeth, painful and involving lots of shouting. The Bank has to cut. But it is not the Fed.

PS: Long-suffering readers will know I set great store by my skip index, based on the number of builders’ skips in my street — two indicating the economy is on trend, four a boom, and none that we are in trouble. Despite extensive searching this past couple of weeks, sometimes at night, the index is still firmly on zero. Weak housing and subdued consumer confidence is taking its toll and I don’t suppose the weather is helping.

I must confess, however, to being a little puzzled. Another useful indicator is the weight of traffic on our roads, and passengers using public transport. My recent encounters with both suggest little let-up in activity.

Does this suggest the London economy, at least, is still booming? Or is it the inadequacies of the transport system and the people who run it, Transport for London, including that daily monument to incompetent traffic management known as the Blackwall tunnel?

It is probably a bit of both. I will devote a column soon to the damage transport inadequacies are doing to the economy. Not to make it too London-centric I shall try to widen it, so any observations are welcome. In the meantime, I will keep looking for those skips.

david.smith@sunday-times.co.uk

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