A Plan B for the banks but not the economy?

So there we have it. The financial tail appears to be wagging the economic dog, to slightly misquote a former IMF chief economist. The insane bungee jumping stock and credit markets we saw across the world in August seem to be having a very real confidence effect in the economy in Britain.

The CIPS/ Markit Services PMI saw its second largest drop since the survey began in 1996. Worse even than during the financial crisis. Only Foot-and-mouth in April 2001 has seen a bigger decline. In ordinary circumstances such a number begets an interest rate cut. The Services PMI numbers are eagerly watched and provide the most closely-watched forward indicator of GDP. Reuters’ Scott Barber compiled this graph to show the correlation between Bank of England rate cuts and this survey.

But interest rates are already anchored at the rock bottom of 0.5 per cent. And inflation is already heading for 5 per cent. City economists are racing to presume that there will be more Quantitative Easing

The cliché-du-jour is that the world economy is in “stall-speed”. Well the UK economy has been flat for 9 months, and today’s figure shows that Q3 2011 even though it will be artificially inflated, is likely to be very weak, on an underlying basis. All-in-all it is highly unlikely that the UK economy has grown much at all in the year since September.

So this bad news could end up being good news for the banks. There is every sign that the deliberations of the Independent Commission on Banking will be parked or gently rolled towards the longer grass on account of not wishing to interrupt with their fabulous credit creation record over the past year.

The economic news is sufficiently dire for the Government to ease up on the banks, on account of not wanting to impinge upon their ability to create credit. But the economic news is insufficiently dire to think about easing up on the pace of their deficit reduction plan, either through tax cuts or slower spending cuts (depending on your politics). Fancy that? The perfect degree of economic slowdown.

There is a danger this might end up looking like Plan B for banks but not for the economy.

UPDATE: 7pm

And even as that blog was published the Planning Minister Greg Clark was telling Parliament that: “We have a crisis of housing and growth in this country”.

“Growth crisis”? This is not the official message.

And it’s not just that. The usual voices on promoting an economic Plan B are now being joined sotto voce by the IMF Director General Christine Lagarde, and rather more loudly (in an interview with The Times) and amazingly the MD of the world’s biggest bond trader, Pimco. Bill Gross in January 2010 said that British public debt “rests on a bed of nitroglycerine”.

Yes now, you guessed it, with the glorious internal logic only available to those schooled in bond market wizardry, Bill Gross thinks that a slowing world economy should see a “fine-tuning” or “re-routing” of the fiscal plan, “that might keep the economy out of recession”.

The Treasury view is still that they’re not for turning. On parking bank reform, and planning the Government appears to be talking up a growth crisis, whereas the official position as regards to macroeconomic policy is that there is no growth crisis.

You can follow Faisal Islam on Twitter @faisalislam