One of my themes this year has been that the US economy would outperform Europe.

Between the fourth and second quarters, US GDP rose by an annualised 1.8% versus 1.0% in the Eurozone and 0.6% in the UK.

Preliminary third-quarter US figures released yesterday show a 0.3% annualised decline but the UK fall was much larger, at 2.1%. Coming Eurozone numbers look set to show a performance closer to the UK than US.

The US figures were depressed by Hurricanes Gustav and Ike and a strike at Boeing. The Federal Reserve estimated these factors depressed industrial production by 2.75% in September, implying a 0.9% impact on the third-quarter average, or 3.6% annualised. Industrial production accounts for 16% of GDP so this will have cut annualised GDP growth by 0.6%. This ignores effects on other sectors. In other words, the preliminary third-quarter growth estimate would have been slightly positive without the disruptions.

US GDP will decline in the fourth quarter but I still think prospects are worse in Europe.

David Blanchflower joined the MPC in June 2006, when money and credit growth were booming. The last move in official rates had been a cut (in August 2005). Blanchflower opposed the quarter-point rises in August 2006, November 2006 and January 2007. In March 2007, he voted for a cut. Had his view prevailed, the credit bubble would have been larger and its subsequent bursting even more destructive.

Bizarrely, in May 2007 Blanchflower joined the MPC majority in voting for a fourth quarter-point rise, implicitly accepting that his opposition to the previous 75 bp increase had been misguided.

Blanchflower resumed his calls for lower rates from October 2007, voting for a reduction at every meeting since then. The MPC did cut in quarter-point moves in December 2007, February 2008 and April 2008. These declines arguably had little effect because the monetary transmission mechanism was broken.

Blanchflower apparently wishes the MPC had emulated the Fed's rate-slashing, although it is debatable whether this has helped either the economy or financial markets. The main impact was to push the dollar lower, contributing to soaring commodity prices and higher inflation. The inflation spike squeezed real incomes and was partly responsible for the 3.1% annualised decline in US consumer spending in the third quarter.

Rising inflation has also been a major economic drag in the UK. Earlier large rate cuts would probably have caused an even greater plunge in the sterling exchange rate and a higher inflation peak.

A large cut is now warranted because 1) inflationary pressures have eased, 2) rates are being reduced in other economies, limiting the risk of a further plunge in sterling and 3) the recent support package for the banks increases the chances that policy easing will be transmitted to borrowers.

Blanchflower's opposition to higher rates in 2006-07 was harmful. He was prescient in forecasting that the financial crisis would lead to major economic weakness but this does not imply that earlier large rate cuts were the correct policy prescription.

The dramatic negative shift in the economic outlook resulting from the post-Lehman freezing of money and credit markets is confirmed by detailed monetary statistics for September released today.

Forget the headline annual increases of 12.4% and 14.2% in broad money M4 and bank lending (excluding securitisations) - these have been hopelessly distorted by a rerouting of interbank business through non-bank financial intermediaries. For a truer read, look at M4 and lending excluding "other financial corporations" (OFCs). Annual increases in these measures dropped to 5.0% and 6.8% respectively in September - the lowest since 1999/2000.

It gets worse. In the last three months, M4 and lending ex OFCs grew at annualised rates of just 2.8% and 2.3% - see charts.

The non-OFC private sector comprises households and non-financial corporations. Companies are under severe financial pressure. Their M4 holdings dropped again in September and are down 3.8% over the last year - the largest annual fall since 1980. Meanwhile, their access to credit has been curtailed at a time when working capital needs are likely to have been boosted by the economic downturn. Outstanding bank credit contracted in the three months to September.

Narrow money developments are equally concerning. M1, comprising currency in circulation and instant-access deposits, rose by just 0.1% in the year to September - the lowest annual increase since 1969. Real M1 contracted by 4.7%, the largest fall since 1980.

With the September figures unlikely to capture the full impact of the freeze, monetary trends clearly warrant a large cut in Bank rate next week. My MPC-ometer continues to project a reduction of 75-100 basis points, with a full-point move likely if three-month LIBOR is above 5.75% at the time of the meeting.

Unsurprisingly, the latest Bank of England Financial Stability Report continues to play down the role of monetary and regulatory policy failures in creating the conditions for the financial crisis.

The Bank's view, like that of former Fed Chairman Alan Greenspan, is that current woes mainly reflect reckless behaviour by banks and other financial institutions, which wise central bankers and regulators were apparently largely powerless to resist.

In the UK context, the story goes as follows. In the early 2000s British banks embarked on a major balance sheet expansion, offering credit to consumers and companies on loose terms. Domestic deposit inflows failed to keep pace with the faster growth of lending, so banks bridged the shortfall by borrowing in international wholesale markets. They also allowed their asset expansion to run ahead of increases in equity, resulting in a rise in leverage. By the time the US subprime crisis broke, banks' funding and capital structures had been fatally weakened.

So far, so convenient. The story can, however, be told in a different way. In an effort to avoid a phantom recession, the MPC lowered interest rates to well below a "neutral" level in the early 2000s. Credit expansion duly accelerated, boosting domestic demand and the current account deficit. A larger deficit is a mirror-image of an increased net inflow of capital. In this case, the inflow was channelled through the banking system, thereby partly financing the increase in lending. Meanwhile, regulators failed to raise concerns about the rise in banks' equity leverage, since their preferred measure of capital strength - the now-discredited ratio of Tier I capital to "risk-weighted assets" - remained stable and well above the internationally-agreed minimum.

The competing accounts are not merely of academic interest. The Bank's self-absolving emphasis on the role of excessive bank risk-taking has contributed to its reluctance to perform its traditional lender-of-last-resort function as well as the penal design of the recent "rescue" plan. This approach will no doubt succeed in achieving Mervyn King's expressed goal of making banking "boring" but arguably at significant and unnecessary cost to the economy.

Euroland monetary statistics for September confirm a weak economic outlook and diminishing inflation risks:

• The liquidity ratio of non-financial corporations (defined as their M3 deposits divided by bank loans repayable within five years) is at its lowest level since 2003 and seems to be following the earlier plunge in the UK ratio - see first chart. Corporate liquidity is a key influence on business investment and hiring.

• Narrow money M1 grew by an annual 1.2% in September, up slightly from July / August but otherwise the lowest on record since 1971 - second chart. Real M1 contracted by 2.3%, a fall exceeded only in 1973-74 and 1980-81. (A note in the latest ECB Monthly Bulletin shows that real M1 growth tends to lead turning points in GDP with a variable lag averaging four quarters.)

• Broad money M3 growth slowed to an annual 8.6% in September from 8.8% in August. Excluding financial intermediaries, the increase was lower, at 8.0%. Household money demand has been boosted by the flat yield curve and a rise in risk aversion, with large inflows to time deposits in recent months. Corporate money growth has slowed significantly.

• Credit expansion also continues to moderate, to an annual 10.1% from 10.8% in August. Recent growth has been partly involuntary, reflecting non-financial corporations and financial intermediaries drawing down previously agreed facilities. Credit should slow more sharply as this effect wanes.

The ECB's assessment that monetary and credit expansion poses upside risks to price stability is unsustainable. Recent trends support the case for an early further cut in official rates.

The 0.5% decline in GDP in the third quarter understates the scale of recent economic deterioration. A weighted average of monthly series for services and industrial output in July was slightly above its May / June average. The economy appears to have fallen off a cliff in August and September as the financial crisis escalated.

The GDP decline is consistent with an average path derived from the 1974-75, 1979-81 and 1990-91 recessions - see the chart below and the previous post for more details. The average path would involve GDP falling by 2-2.5% between the second quarters of 2008 and 2009, moving sideways over the following year and recovering by 2.5% in the year from the second quarter of 2010. Output would regain its recent peak level only in 2011.

This profile would imply an annual decline in GDP of 1.7% in 2009 followed by growth of just 0.4% in 2010 - significantly weaker than current consensus forecasts of -0.2% and 1.2% respectively (as reported by Consensus Economics Inc).

Incorporating the third-quarter fall into the MPC-ometer confirms the forecast of a cut in official rates of 75-100 basis points on 6 November. The model favours a full-point move if three-month LIBOR is still above 5.75% at the time of the meeting.