A couple of news snippets from America have thrown the markets into reverse. House sales slowed by 3.6% over the year to September, and a measure of consumer confidence has also slipped. This news closely follows other disappointing news about US retail sales - though the latter figures are distorted somewhat by the ending of the car scrappage scheme in September.

The news from across the pond serves as a warning that - while the worst of the recession may be over - the route back to sustained growth is likely to be long and difficult. We knew that already. A look at the long term trend suggests that the markets are not currently overvalued, and that the current blip should not represent the start of a more prolonged decline.

In a Guardian article over the weekend, David Blanchflower has argued that 'a few years of inflation, around 5% or so, would be a really good idea'. It is certainly the case that inflation could help reduce the national debt and so improve the public finances - simply because it would reduce the real value of that debt. That being the case, it is almost certainly part of the hidden agenda for all political parties as we run up to the next election.

However, inflation hits some people harder than others. In particular it hits those on fixed incomes (which are often low incomes) - people like pensioners. To advocate a deliberate stimulus of inflation will be regarded by many observers as bizzare, at least without introducing special protection for disadvantaged groups. This means indexation of pensions. How effective a policy of inflation would then be is uncertain. The long and short of it is that the current situation demands that people feel pain in the adjustment.

Prof Blanchflower has done us all a service in bringing what are surely hidden agendas out into the open. Whether he is right in judging inflation to be a 'really good idea' is moot. But it is certainly right that we should have the opportunity to discuss these things in the open.

The Confederation of British Industry has generated some controversy with its report higher education. It advocates increased tuition fees, temporary abandonment of the target that 50% of the cohort should benefit from higher education, more financial support from business, and increased support for the STEM (schience, technology, engineering and mathematics) subject areas. These are not straightforward proposals.

Increasing tuition fees certainly sounds like an appealing way of maintaining funding for the universities at a time when the public finances are going to be squeezed. But the way in which students are funded in the UK make this option less simple to implement than might appear at first glance. Students receive a loan from the Student Loans Company, out of which they pay their tuition fees. These loans are funded by government. To be sure, the government can package these loans up and sell them to the private sector as parcels of debt - financial institutions are happy to pay upfront for an asset that will yield them returns in the future. But these parcels have to be sold at a discount. This discount reflects the fact that not all of what is loaned to students ends up being repaid - students on low incomes do not make repayments, and there is a write-off of the debt after 25 years. So, even though an increase in tuition fees might lead to a reduction in the amount of money that government needs to give directly to the universities, it would also lead to an increase in the amount of government expenditure needed to fund the student loan system. The extent to which tuition fees could be raised therefore entails a rather delicate balancing act. The Institute for Fiscal Studies has done interesting work on this. Some increase in tuition fees would certainly be possible. But the extent to which this could be done without entailing additional government expenditure is more limited than some commentators would appear to think.

The 50% target has always been contentious - not least because the figure itself appears to have been plucked out of thin air. It might reasonably be argued that, rather than have a target, young people should be allowed to make their own decisions about whether or not higher education represents, for them, a good investment. This year, many thousands of qualified school leavers have not succeeded in finding places in higher education. Abandonment of the target now would appear to be perverse.

It is not new for there to be calls for businesses to provide financial support to higher education. Many people agree that they should, but this does not, of course, mean that they will. Workers are not, in general, bound to their employers - we do not live in a slavery society. This means that workers are mobile across firms, which in turn means that firms are reluctant to pay for workers’ general education – they have no guarantee that the worker will stay with the firm long enough to give the company a return on its investment in that education.

The STEM subjects have been prioritised by government in recent years. There are, however, other subjects – notably business and law - that equally offer students a high rate of return.

While the CBI proposals are to be welcomed in that they will encourage debate, one would hope that the debate that is to follow will recognise some of the nuances that the proposals themselves fail to appreciate.

The National Institute for Economic Research estimates that the UK economy grew in the three months to the end of August this year. Official data will not be released until later in the year, and will cover the three months to September.

Meanwhile the FTSE index has risen above 5000 and appears - for now at least - to be staying there, giving further cause for optimism.

If these indicators are to be trusted, it would suggest that the recession has been quite short - five quarters - but also quite sharp. The rapid return to growth has surely been helped by the aggressive policy response of governments around the world. But that response in itself - desirable though it has been - has compromised the ability of economies to recover rapidly. The gulf that has emerged between public spending and tax revenues in this recession means that fiscal tightening over the next few years is inevitable. That tightening will constrain the growth of the economy in exactly the same way as the recent expansion of the budget deficit has stimulated it. The recession may be over, but the aftermath will be with us for several years to come.

The OECD has published the latest in its series of reports, Education at a Glance. This highlights the substantial rate of return to higher education in all OECD countries, and strongly argues the case for further investment in students' education, particularly as a means of ensuring that countries emerge out of recession with a labour force that is as strongly equipped as possible. This echoes the case made several months ago by David Bell and David Blanchflower.

Governments have been aggressive in their policy response to the current recession, and the impact of this will be felt for years to come in the form of a squeeze on public finances. But education has considerable appeal at times like these: we invest in young people's skills rather than let them depreciate through lack of use; we avoid the scarring effects of unemployment which can blight whole careers; we ensure that aggregate demand is stimulated, but also - crucial in the long run - aggregate supply is boosted, as the productive capacity of the economy is enhanced through education.

Shaping a Fairer Future is an update from the Women and Work Commission about progress in securing gender equality in the UK. The crude gender pay gap has risen slightly since 2007, to 23 per cent - while this is an unsatisfactory measure in that it makes no allowance for differences in experience or other characteristics, the direction of change remains a source of concern.

The report points to gender stereotyping at early ages and failures to secure a satisfactory work-life balance as two major areas where change is needed. It notes some areas of progress since the Commission's earlier report three years ago, but at the same time laments the fact that recommendations made at that time have not been followed up.

While much of the new report is to be commended, some of its recommendations appear underdeveloped. For example, recommendation 34 urges the Department for Children Schools and Families to consider 'what more can be done to increase the wages of childcare workers, many of whom receive low/minimum wage, while ensuring that childcare costs remain affordable'. This is very worthy, but wages are of course determined primarily by the forces of demand and supply - as indeed are childcare costs. If this recommendation is a veiled call for subsidies, perhaps, in the current economic climate, the Commission should apply a rather brutal reality check.

Gross Domestic Product (GDP) continues to fall keeping the economy in recession. The latest figures show that GDP fell by 0.8% in the second quarter of 2009 - suggesting that the optimistic monthly estimates for April and May that had been produced by NIESR (and discussed earlier on this blog) were biased up. This is the fifth quarter of the recession. While the decline in output in the second quarter is certainly more modest than in the first quarter of this year, it still looks as though it will be the end of this year before the recession ends. And it will be many (18-24, possibly more) months later before unemployment starts to ease.

On the not-so-dismal side, retail sales have bounced back over the last month or so, and the housing market continues to show some signs of recovery with increased sales (albeit at depressed prices).

We may be past the trough, but there is still some way to go before we can say that output is rising and the recovery is properly under way.

The Chancellor of the Exchequer has announced plans to reform the regulation of the banking system in the wake of the financial crisis. The plans involve:

(i) capital asset requirements for banks, in the form of minimum required ratios that will vary according to the riskiness of activity
(ii) an enhanced regulatory role for the Financial Services Authority (FSA), and special focus on the activities of key banks
(iii) curbing the tendency for banks to take excessive risks, by devising a code that will regulate banks' remuneration practices
(iv) improved systems of corporate governance

As far as they go, the plans are good. One might quibble about whether certain functions are better carried out by the FSA or the Bank of England - but that is a secondary quibble. A more major concern, however, is that these reforms fail to tackle the problem that was at the very heart of the crisis - that of hidden information. Capital assets ratios can be enforced if the regulator knows all about a bank's transactions; risk-taking can be curbed if the regulator knows all about the risks that are being taken. But if there is latent information, the fundamental problems remain.

The economic theory of principal and agent shows that it is possible to design incentive schemes that ensure that agents (in this case, banks) behave in a way that is compatible with the interests of the principal (in this case, the regulator) even when the agents have information that is not revealed to the principal. Smart reform of the banking system should focus more on the design of such incentives, and be less trusting about the extent to which banks will be prepared to reveal all.

In a nutshell, the proposals are a good start, but they betray a naivete that, in the wake of the events of the last two years, is a little surprising. The plans should go further.

The National Institute for Economic and Social Research (NIESR) has released its latest estimates of monthly GDP for the UK. These suggest that GDP has grown in each of the last two months, and that the trough of the recession was in March of this year.

NIESR has a good track record, and its estimates deserve to be taken seriously. This being the case, the news is very encouraging. Indeed, it would mean that the recession has been unusually short, in spite of the severity of the downturn in the last quarter of 2008 and first quarter of 2009.

My expectation has been that we would start to see a recovery in the last quarter of this year or the first quarter of next. It would be nice to be proved wrong if it were to mean that recovery comes sooner than I expected. But there is still room for caution. Recessions do usually last longer than three or four quarters. And in any event, the recovery in output growth typically leads recovery in the labour market by up to two years. So, unfortunately, unemployment is still set to rise for a while to come.

Barry Eichengreen and Kevin O'Rourke have recently provided comparisons of the current state of the global economy and that which prevailed in 1929. Their early comparisons generated some alarm in that the pattern of the Great Depression seemed to be replicated in the current data. The most recent update suggests that there is now room for cautious optimism. Over the last couple of months, the decline in world economic output has slowed, suggesting the possibility that we may be near a turning point. Stock markets have also recovered somewhat over that period.

There is further reason for this optimism. The policy response has been much more aggressive this time around. Using a 7 country average, Eichengreen and O'Rourke show that interest rates are now close to zero, while in the 1929 crisis they remained at around 4 per cent.

While the overall outlook is starting to improve, there are some countries where the immediate prospects still look very bleak. Output is still falling rapidly in Italy and France, for example. It is still some weeks before we shall see the official UK data for the second quarter of 2009 - we shall all await those with interest.

The OECD's leading indicators have been published this week, and show a little bit of encouraging news. The series, which were plummeting downwards after falling off a cliff in the early part of last year, have shown some signs of recovery in several countries. In the UK, there is indication that the bottom of the trough in the series may have been passed. It is still early days.

Today's budget presents the Chancellor, Alistair Darling, with a tough challenge. The immediate prospects for the economy remain poor, and further stimulus would be welcome - so long as it can be concentrated in areas where the impact will be instantaneous. The recession, alongside the bailouts of the banks, is taking a toll on the public finances, though - tax revenues fall as the national income is reduced, while at the same time government spending on benefits increases. The scale of the hit on the public purse is such that the markets need reassurance that plans are in place for the government to repay what it is borrowing. The problem for the Chancellor is that the more reassurance he gives, the more likely people are to curtail their current spending in anticipation of future tax rises and spending cuts, and so the harder it will be to ensure a healthy recovery. That's a difficult tightrope to walk.

Things have been made easier for the Chancellor - but not necessarily for the country as a whole - by the failure of the G20 to agree a coordinated fiscal stimulus. It makes little sense for the UK to go it alone on this (any more than it has done so already). Much of any extra spending would likely spill out of the domestic economy. Hence, for example, the much mooted deal for the car industry - giving discounts on new cars to people who scrap old ones - would involve the British taxpayer in subsidising foreign car manufacturers; while the policy would no doubt help car dealers, parts manufacturers, and other firms in this country, it still does not look like smart policy. Proposals to stimulate construction (which does not involve such leakages out of the domestic economy) look like a better bet. But they need to be implemented quickly.

There are mixed signals about the state of the housing market this week, in reports from the Nationwide and Halifax. Nationwide shows a slight increase in house prices during March, while Halifax indicates that prices continued to fall.

A graph of the two series of statistics together appears to show that the downturn in house price inflation - as measured year on year - is bottoming out. But while the curve lies below zero, prices remain lower than at the same time last year.

Other recent statistics, released by the Bank of England, show that the number of mortgage approvals for house purchases increased quite sharply in February, albeit from horribly low levels. It is probably too early to talk of green shoots, but in the housing market the dead leaves are now falling less thickly.

The G20 London summit has closed. The world leaders have achieved agreement on some, but not all, of the issues on the agenda.

The summit subscribed to sound principles for the reform of the banking system, broadening the scope of regulation to include the credit rating agencies and hedge funds, removing conflicts of interest, adopting international standards, and regulating bonuses. The leaders also committed to a common global approach to tackling the problem of toxic assets.

Over $1000 billion will be committed by the G20 to support international agencies such as the International Monetary Fund (IMF) and World Bank. In turn, the IMF will increase its allocation of Special Drawing Rights (SDRs) to its members by up to $250 billion. SDRs were created in the late 1960s as an alternative asset to gold and the US dollar. This is the first time an increased allocation of SDRs has been made since 1981, and it represents a means of increasing liquidity at an international level in much the same way as quantitative easing increases liquidity in a domestic economy. This relaxation by the IMF is likely to be particularly helpful to middle income countries that are big enough to have reserves at the IMF yet not so big that they have been able to put major quantitative easing programmes of their own in place.

The rhetoric is anti-protectionist. Good - protectionism would be hugely damaging to the efficiency of the global economy, and would throw into reverse the fantastic gains that have been made in alleviating poverty, particularly in the developing world, over the last 20 years. But, here at least, we know that the reality is diverging from the rhetoric - a recent VOX publication demonstrates that trade has collapsed dramatically in the wake of increased insidious protectionism. The rhetoric needs to win out, and the moves toward back-door protectionism strongly resisted. The summit resolved to support trade by injecting $250 billion of trade finance to be made available through the development banks, the World Bank, and other international agencies. It also resolved to ask the IMF to use the proceeds of gold sales to help the poorest countries.

There has been no agreement to co-ordinate a further fiscal stimulus, though there was an anodyne statement that the governments would 'do what it takes to restore global growth' and that a global stimulus of $5000 billion has already taken place. In the absence of this, any major further unilateral stimulus from the UK government is now unlikely, especially in the form of further tax cuts - the benefits of these would too readily leak out of the domestic economy. This news is a mixed blessing - the public finances are weak, but a coordinated stimulus would have been very welcome. There has been mention of investment in green projects, and this seems to be an area where countries will each work things out their own way. Let's wait and see what happens in the budget later this month.

The summit represents a political as well as an economic watershed in that some rapidly developing countries - notably China - will contribute more to international agencies, and so will gain considerably more voice. At the same time, the international agencies will increase their surveillance of the world economy.

Overall this represents a mixed outcome. The G20 will meet again later this year. By then it may be clearer where the world economy is headed, and we will know more about how desirable an extra fiscal stimulus might have been. The extent to which, amongst the countries that make up the G20, the response is as coordinated as the rhetoric will also, by then, be clearer.

The plot is straightforward. Britain and the US want a coordinated fiscal stimulus package. Meanwhile France and Germany want reform of the regulatory system for the financial sector. In truth no-one would disagree with them, but they are promoting the idea of regulation as a smokescreen that can hide their opposition to what they brand as the 'Anglo-Saxon' calls for further fiscal expansion.

The reality is that the world needs both regulatory reform and fiscal stimulus. The G20 summit in London is likely to provide the first, and we need to wait and see whether it will deliver on the second. Sarkozy and Merkel need to act tough to impress their domestic audiences, and it is not clear how closely matched their rhetoric will be to their actions. The hype is that the crisis started, and so needs to be solved, in countries other than their own. But they must surely know that, in an integrated world, blame is really irrelevant to the solution. And solution, now more than ever, requires co-ordinated response.

Lord Turner, chair of the Financial Services Authority (FSA), has today published his review of bank regulation. He was asked to produce this review by the Chancellor of the Exchequer in the wake of the banking crisis.

He recommends that banks should be required to hold more of their assets in the form of reserves, building up these reserves during prosperous times, so that they are not engaging in excessive lending that can result in cash flow problems. The recent policy has been to allow banks to make their own judgements about their levels of reserves - and many, seduced by the returns that are available from more profitable investments, have been caught out by allowing their reserves to fall too low. So this proposal is really about protecting banks from themselves. The proposal goes much further than stipulating a reserve assets ratio, as it drills down into the detail of banks' balance sheets.

Lord Turner raises the possibility that, to promote cautious lending, limits (dependent on the borrower's income) should be placed on the amounts that can be offered as mortgage loans. He also recommends that banks should be required to publish data on the risks that they are undertaking when making investments. It is difficult to see how this can be operationalised other than through a reliance on credit ratings - which are themselves now largely discredited and in need of reform. The Turner report proposes such reforms.

The report also states that, while the FSA has, in the past, taken the view that the market is right and that decisions made by banks in response to market forces are good decisions, it will in future question that view; in so doing it will become a more challenging regulator for the banks to work with. This has to be a good thing.

The report addresses also the bonus culture that has existed in financial institutions, and makes a sound recommendation that payment of bonuses should be deferred in order to ensure that workers' behaviour serves the long term interests of the bank.

Throughout the report, the emphasis is on securing international agreement and adherence to the reforms wherever possible.

But the key to the success of all of the above proposals is the quality of information that banks are required to provide. Auditing of this information will need to be robust, with severe penalties for misrepresentation. We have learned a lot about the power of hidden information over the last couple of years, and we have learned about how easily information can be concealed from view. Now we need to learn about how to flush it out. Lord Turner's report is a very welcome step in the right direction.

The International Monetary Fund (IMF) has revised downwards its growth forecasts for the UK economy over the next couple of years, and now expects overall negative growth in 2010 as well as 2009. While there is certainly a possibility of deflation and prolonged recession, my judgement would be that this remains a possibility rather than a likelihood. In particular, the introduction of quantitative easing should make falling prices less likely. The IMF forecasts therefore look pessimistic. It is perhaps worth noting that the IMF will not publish these forecasts until the end of April, as part of their World Economic Outlook series. Much can change between now and then.

Unemployment in the UK has risen above 2 million as the recession continues to bite. News on this front will get worse, probably much worse, before it starts to get better. Recessions tend to be fairly short lived affairs, and so growth should resume within the next year or so. But it takes more than a little growth to stem the rise in unemployment. Owing to the impact of technological change on productivity, the growth rate of real output in the UK needs to be about 2.5% per year in order to keep unemployment from rising. So we can expect the unemployment rate to rise for quite a while yet. Indeed, while the typical duration of a recession as measured by the period over which GDP growth is negative is about 18 months, it is typically the case that the unemployment rate rises for a further 2 or 3 years after the recession ends.

A new debate has opened about university tuition fees in the UK. A survey of vice chancellors indicates that most are in favour of a substantial rise in the upper limit on tuition fees, currently set at £3145 per year for UK domiciled undergraduates.

This might appear to be quite a simple question of striking a balance between public and private contributions to the cost of higher education. The reality is somewhat more subtle. Current practice is for the government to bundle student loans together and sells the debt to private sector investors - this debt is sold at a discount in order to reflect the fact that not all of the amount owed by students will be repaid. For example, if a graduate has any debt outstanding 25 years after graduating, then that debt is written off. As things stand, the discount is not huge, but raising tuition fees would inevitably lead to an increase in the debt that is not repaid - and hence would require the government to sell this debt off at a more substantial discount.

Put simply, raising tuition fees would raise the government's own commitment to spend on higher education. Removing the cap on tuition fees altogether would require the government to sign a blank cheque.

There are several potential fixes to this dilemma, none of them very pleasant. The rate of repayment of the loan could be raised above the current level (which is 9% of all income above a disregard). The interest rate subsidy on loans could be reduced or scrapped altogether. Loans to cover tuition fees could be limited to (say) £3145, and students would have to fund the gap between this and actual tuition fees - perhaps by taking out commercial bank loans or by way of parental donations. Another alternative would be to convert the current system into a fully fledged graduate tax, whereby graduates pay a higher rate of income tax than other workers, with no upper limit on the amount of repayment of the cost of higher education.

It is inevitable that universities, nervous about their prospects for continued government funding once the economic crisis is over, should wish to explore other avenues. The problem is that any attempt to shift more of the costs onto graduates would have to be very cleverly engineered in order to avoid imposing substantially greater costs also on the taxpayer.

The Bank of England has once again cut its interest rate, this time to 0.5%. Significantly, the cut has been accompanied by an announcement that the Bank will engage in quantitative easing (QE) in order to render less likely the chances of inflation turning negative later this year. Such deflation would be extremely harmful to the prospects of economic recovery, since demand would collapse as people postpone nonessential purchases in order to take advantage of falling prices.

QE is likely, initially at least, to operate via the Bank's usual mechanisms - the new money will be released into the economy as the Bank purchases bonds and other securities from the commercial banks. The commercial banks would then hold more of their assets in the form of money, which they would then be able to lend to businesses or prospective house purchasers and consumers.

On 22 April, the budget will be announced. By then, it may become clear that QE could be used in order to finance a fiscal expansion. This, so long as it is concentrated on 'shovel-ready', quick win projects is also desirable under the present circumstances.

Some other recent announcements also give cause to think that we are now moving in the right direction. Yesterday it was announced that BT would invest £1.5 billion in fibre optic cabling. The company had been holding back on this investment in the fear that regulation would prevent it from reaping the rewards of its investment. But the regulator, Ofcom, has now guaranteed that there will be no regulatory intervention for superfast broadband, thereby clearing the way for this substantial private sector investment project to be kick-started.

Another recent announcement guarantees the future of Private Finance Initiative (PFI) projects that had been put under threat because of difficulties faced by private sector firms in securing funding from the financial institutions. The government is prepared to make direct loans in these circumstances. This is a vitally important decision because many such projects are already underway, and offer some of the most 'shovel-ready' opportunities for investment.

In this context, it is perhaps surprising to see that the opportunity for a significant capital investment in the further education sector has been pushed back. Hopefully this missed opportunity can be recovered at the time of the budget.