OECD trade – the combined volume of exports and imports – contracted by 18% between the second quarter of 2008 and the first quarter of this year. However, two pieces of information released this week suggest that trade is now recovering.

First, German export orders rose by a further 8% in June, to stand 19% above the low reached in February. Orders are correlated with OECD trade volumes, with a historical "beta" or elasticity of about two – see first chart.

Secondly, the sum of the US ISM manufacturing imports and export orders indices broke above 100 in July, i.e. more firms now report rising volumes than falls. This indicator is also a good proxy for changes in OECD trade – second chart. The rise in the imports index probably mainly reflects slower destocking by US firms.

A comparison with the last three recessions suggests that National Statistics' current estimate of a fall in GDP of 5.7% between the first quarter of 2008 and the second quarter of 2009 will be revised to show a significantly smaller decline over coming years. This claim is supported by labour market indicators, which, though weak, have deteriorated by less than would have been expected given the estimated GDP drop.

The Bank of England has helpfully compiled a "real-time" database of national accounts statistics that, for some series, including GDP, extends back to 1976. Following the end of the recessions in 1974-75, 1979-81 and 1990-91, GDP was estimated to have declined from peak to trough by 4.6%, 6.5% and 4.3% respectively. In the latest vintage of statistics, the falls are 2.7%, 6.0% and 2.5%. So revisions have cut the GDP drop by 1.9 percentage points for 1974-75, 0.5 pp for 1979-81 and 1.7 pp (after rounding) for 1990-91.

The smaller adjustment in 1979-81 may be misleading because revisions have also resulted in a major change to the profile of the recession. The originally-estimated 6.5% GDP decline referred to the change between the second quarter of 1979 and the third quarter of 1981 but the recession trough was subsequently shifted to the first quarter of the latter year. The latest statistics show a 4.6% GDP decline over the original recession period.

These comparisons indicate that the current estimate of a 5.7% GDP decline by the second quarter of 2009 could eventually be revised down by as much as 1.9 percentage points. A simple model for GDP growth based on changes in vacancies and claimant-count unemployment confirms that a substantial adjustment is possible. The model tracks the GDP falls in the last three recessions reasonably closely and suggests an annual decline of 3.7% in the first quarter of 2009 versus a current official estimate of 4.9% – see chart.

By announcing a further £50 billion slug of QE, bringing the total to £175 billion, the MPC has signalled that it places more weight on weak GDP numbers and still-modest broad money expansion than recent stronger business surveys, which suggest an early return to economic growth.

The additional £50 billion of purchases will occur over three months, implying a monthly rate of £16-17 billion, down from about £25 billion in the first phase of QE between March and July.

The decisions to stop QE and restart it a month later have resulted in unnecessary market volatility. The MPC could, instead, have announced a slowdown in buying last month (as some commentators suggested at the time), confirming this reduced pace at today's meeting.

Banks' cash reserves at the Bank of England should rise further from their current level of £164 billion as a result of today's decision but by much less than £50 billion because of an offsetting decline in repo open market operations. Reserves are currently about three times the value of notes and coin circulating in the economy (£54 billion at the end of June), versus a pre-crisis ratio of less than a half.

With cash piling up at the Bank of England, banks have less need to boost their holdings of gilts and Treasury bills to ensure sufficient liquidity in the event of another market seizure. If banks lower their buying or even sell gilts to the Bank, this will offset the positive impact of QE on the broad money supply. (Banks' holdings of gilts and Treasury bills have fallen slightly since QE began, having risen strongly in late 2008 and early 2009 – see chart.)

The Bank of England's favoured broad money measure – M4 excluding money holdings of "intermediate other financial corporations" – grew at an annualised rate of only 3.7% during the second quarter despite a large positive impact from official gilt purchases. Coupled with a significant downward revision to the first-quarter rate of increase, from 6.2% annualised to 3.3%, the latest figures imply that monetary trends are less favourable for economic prospects than seemed the case a month ago, on the basis of data up to May.

While today's report is disappointing, the 3.5% annualised growth rate of the M4 measure during the first half is slightly higher than a 2.7% increase in the second half of 2008. Moreover, a broader liquidity measure including Treasury bills and repo borrowing by the Debt Management Office (a close substitute for bank repos included in M4) has risen by 5.2% annualised so far this year. The large first-quarter revision, coupled with the high volatility of its monthly estimates, suggest that the Bank is still refining its approach to measuring the new aggregate, implying the possibility of further adjustments.

M4 growth remained sluggish during the second quarter because the positive impact of QE was offset by a rise in banks' "net non-deposit sterling liabilities" and, to a lesser extent, a reduction in their net external and foreign currency lending. The increase in non-deposit liabilities partly reflects banks' efforts to rebuild capital by retaining profits and issuing long-term debt and equity. However, both of these monetary counterparts show considerable volatility and the negative second-quarter effect may well reverse during the second half.

In assessing the economic implications, it is important to focus on real rather than nominal money supply trends. The annual rate of change of real M4 – relative to the retail prices index – has recovered from a low of -0.7% in the third quarter of 2008 to 4.7% by the second quarter, supporting expectations of economic improvement during the second half. With RPI inflation on course to rebound sharply in 2010, however, nominal money expansion will need to accelerate significantly over the remainder of 2009 to sustain real growth at its current rate.

The Bank's gilt-buying will have further lagged positive effects on monetary trends during the second half but today's figures suggest that the MPC should extend asset purchases by at least the further £25 billion currently mandated at its meeting on Thursday. Until broad money growth revives convincingly, there remains a risk that a near-term economic recovery will give way to renewed weakness in 2010-11.

A post in March argued that – contrary to the claims of the FT's Martin Wolf and many other commentators – sterling had fallen to a level implying significant and unsustainable undervaluation. This judgement was based partly on evidence from the quarterly CBI industrial trends survey – the percentage of manufacturers citing price competitiveness as a constraint on exports was the lowest since 1974.

Sterling's effective index has rallied by 14% from its low in late December and by 9% since March. Yet the July CBI survey, released during MoneyMovesMarkets' absence, shows that exporters remain bullish about their ability to compete: at 41%, the proportion citing price constraints remains far below its 1972-2006 average of 61% – see first chart. Worries about sterling's rebound aborting an economic recovery are therefore misplaced.

In any case, the July manufacturing purchasing managers' survey released today shows that domestic demand rather than exports is driving economic improvement. While the overall new orders index jumped to 55.9 last month, its highest level since November 2007, the export orders index was little changed at 48.5. Orders strength suggests an imminent resumption of manufacturing growth – second chart.