The further upward revision to fourth-quarter GDP growth to 0.4% from an originally-reported 0.1% brings the official series into line with earlier expectations. The initial 0.1% estimate, released in late January, probably influenced the MPC members who considered expanding gilt-buying at the February meeting.

The revised figures also confirm that the fall in non-North Sea output in the recent recession was smaller than during the 1979-81 contraction. Gross value added (GVA) excluding oil and gas declined by 5.8% between the first quarter of 2008 and third quarter of 2009 versus a 6.4% drop between the second quarter of 1979 and first quarter of 1981 – see chart.

On top of the fourth-quarter upgrade, the fall in GVA excluding oil and gas in the third quarter was lowered from 0.2% to 0.1% (0.08% to two decimal places). Further revisions may show that the non-oil economy bottomed in the second rather than third quarter, as suggested by business surveys and labour market evidence.

The economic polling model discussed in prior posts suggested that the Conservative lead over Labour would fall into hung parliament territory in early 2010 but rewiden in the spring, mainly reflecting the negative impact on government popularity of a sharp increase in retail price inflation. Recent polls, showing a Tory fightback, are consistent with this "forecast".

The model uses ICM polling data, which extends back to the early 1980s. (ICM is well-regarded, having scored a notable success at the 1997 election.) Based on recent economic data and a forecast further rise in inflation to 4.5% by April, the model suggested a Conservative / Labour lead of seven percentage points in March, rising to nine in April and 11-12 in May – probably sufficient to produce a Conservative majority.

The latest ICM poll, published in the News of the World on Sunday, reported an eight point gap, up from six points a fortnight earlier.

The suggestion that the economy is turning less favourable for Labour is supported by the EU Commission consumer survey for March, showing a fall in the composite confidence indicator to -5 from -2 in February – a four-year high. This may reflect the impact of higher inflation on spending power – the net percentage of consumers reporting higher prices over the last 12 months rose to 18 in March, up from a low of 7 in November and above the average of 12 since 1990.

The Bank of England's favoured broad money measure – M4 excluding money holdings of non-bank financial intermediaries – rose by 0.3% in February, defying expectations of weakness following the cessation of the Bank's gilt-buying in January.

Within overall broad money, M4 holdings of private non-financial corporations rose by 0.5%, pushing three-month growth up to an annualised 4.6%. Companies also increased their foreign currency deposits while continuing to repay bank borrowing, resulting in a further rise in the liquidity ratio to its highest level since June 2007 – see chart. Corporate M4 and the liquidity ratio are better leading indicators of the economy than aggregate broad money.

Corporate credit contraction reflects demand weakness much more than inadequate supply – retained earnings are running well ahead of capital spending so firms must either increase their holdings of financial assets or repay debt. Credit demand should revive as investment and hiring recover. The decline in "sterling unused credit facilities" slowed to an annual 8.7% in February versus a peak of 19.5% last April.

While corporate money is picking up, financial institutions' M4 holdings – excluding intermediaries – fell again in February and have declined by 20% annualised over the last three months. Lower cash levels imply less "fuel" to propel asset prices higher, consistent with other evidence of a deteriorating liquidity backdrop for markets.

The rise in aggregate broad money in February reflected a strong positive influence from external and foreign currency flows, according to the Bank's "credit counterparts" analysis. The "externals" were heavily negative during 2009 as a portion of the liquidity created by the Bank's gilt purchases flowed overseas. This effect may now be reversing.

The ECB has increased its backdoor support for Greece during the recent crisis, according to Bank of Greece statistics. Lending by the central bank to the domestic banking system rose by €12.5 billion in February to a record €59.8 billion – see first chart. Banks used the cash partly to buy an additional €2.7 billion of Greek government bonds and cover a €3.3 billion withdrawal by domestic private depositors.

A key component of the Greek rescue plan agreed yesterday was the confirmation by ECB President Trichet that the central bank will continue to accept collateral rated down to BBB- in its lending operations beyond year-end. This represents a defeat for Bundesbank-led ECB hawks who wanted to return the minimum rating to its pre-crisis level of A-, thereby cutting Greece adrift in the event of Moody's downgrading its rating to match S&P and Fitch, both at BBB+.

The success of the plan may hinge on whether it stems the incipient run on Greek banks. Private deposits have fallen by €8.4 billion, or 3.5%, since December as EMU exit worries have mounted – second chart. The Bundesbankers may have been forced to agree to keep Greece's life support switched on in return for IMF participation in the rescue deal but could baulk if backdoor lending continues to balloon.

The Budget was low-key and does not meet its aim of placing the UK on a "credible path of fiscal consolidation". The projected fall in borrowing over the medium term continues to rest on optimistic economic and financial assumptions and an absence of detail about future spending cuts.

The Chancellor has been able to create the illusion of fiscal progress by revising up excessively-pessimistic revenue projections presented in the April 2009 Budget and carried over to December's Pre-Budget Report (PBR). Net taxes and national insurance contributions are now forecast at 33.9% of GDP in 2009-10 versus 33.2% in the PBR. This explains the cut in public net borrowing from 12.6% of GDP to 11.8%.

The revenue "windfall" carries over to future years, accounting for the cut in the 2014-15 borrowing projection from 4.4% of GDP in the PBR to 4.0%.

Projections for spending, by contrast, are little changed. Total managed expenditure (TME) is forecast to fall from 47.9% of GDP in 2009-10 to 42.3% in 2014-15. The 5.6 percentage point decline over five years is ambitious but not unachievable – TME fell from 47.8% of GDP to 38.9% between 1983-84 and 1988-89. The Chancellor, however, provided no new information on the departmental distribution of cuts. Capital spending will be a major casualty, falling from 4.9% of GDP in 2009-10 to 2.6% by 2014-15, at odds with the claim that the Budget is designed to support investment.

The forecasts for debt interest continue to look optimistic. Net interest is projected to rise from 1.9% of GDP in 2009-10 to 3.3% by 2014-15. The latter figure, however, implies an average interest rate on net debt of only 4.4%, effectively assuming away any future funding difficulties. Each one percentage point rise in the average interest cost would boost the 2014-15 net interest bill by 0.7% of GDP.

The various Budget measures were designed to attract headlines but are insignificant in macroeconomic terms. A net "giveaway" of £1.4 billion in 2010-11 is offset by tax changes yielding £150 million and £705 million in 2011-12 and 2012-13.

The Debt Management Office projects that net gilt sales (i.e. gross sales minus redemptions) will fall from £211 billion in 2009-10 to £148 billion in 2010-11 – a smaller decline than expected, reflecting a cut in Treasury bill financing from £19 billion to -£2 billion. Assuming no further Bank of England buying, the supply of gilts to be absorbed by the market will rise from £28 billion this year to the full £148 billion in 2010-11 – well above the previous record of £110 billion in 2008-09.

Consumer price inflation fell from an annual 3.5% in January to 3.0% in February but this is unlikely to mark the beginning of a sustained decline to about 1% by early 2011, as forecast by the Bank of England in the February Inflation Report.

A return to 3% was predicted in a post last month and reflected a fall in food and energy inflation together with a large monthly rise in "core" prices in February 2009 dropping out of the annual comparison. A further decline, however, is unlikely near term: monthly core price increases were low over March-June 2009 while energy inflation should rebound as a result of higher petrol prices and cuts in household bills last spring falling out of the calculation.

Assuming no significant impact from Budget decisions, CPI inflation is projected to fluctuate in a 3.0-3.25% range until mid-year before declining modestly during the second half, remaining well above the 2% target.

Services inflation has exerted downward pressure on the headline rate over the past year, falling from an annual 4.6% in December 2008 to 3.0% in February. The decline, however, may be coming to an end as the economy recovers: the balance of consumer services companies planning to raise prices has increased sharply, according to the first-quarter CBI / Grant Thornton survey released earlier this month – see first chart.

Goods inflation excluding food and energy, meanwhile, eased from an annual 3.3% to 2.6% in February but will be underpinned by recent exchange rate weakness and pass-through of surging raw material costs – sterling commodity prices, as measured by the Journal of Commerce industrials index, are two-thirds higher than a year ago. The balance of CBI manufacturing firms planning to hike prices rose to an 18-month high in March and is above its long-run average – second chart.

The February headline rate of 3.0% compares with the Bank of England's forecast a year ago that inflation would average 1.3% in the first quarter of 2010. The Bank has failed to provide a coherent explanation for its forecasting miss and markets appear to be increasingly sceptical of its inflation-fighting commitment, judging from a widening yield gap between conventional and index-linked gilts – third chart.