ceedee's posterous

A record £400m was repaid from personal borrowings in December as consumers cut their debts, the Bank of England said on Tuesday.

The net repayment of unsecured loans was the largest since records began in 1993 as heightened concerns about the wider economy and jobs made consumers lose their appetite for borrowing.

Credit card borrowing was also flat for the third consecutive month, according to the latest Bank of England figures.

Mortgage approvals rose to a two-year high in December, but analysts said the housing market remains weak compared with long-term norms.

An extra 750,000 people will join the ranks of the long-term unemployed over the next four years due to deteriorating economic circumstances, according to new government forecasts.

The figures, lodged in the House of Commons library last week by the Department for Work and Pensions (DWP), show an increase of 32% from 2.4 million to 3.3 million in the number of people expected to be entered into the Work Programme – the government's flagship project for finding work for those who are typically out of work for longer than 9-12 months.

More than 100,000 prison leavers will now also be entered into the Work Programme for the first time but when this group excluded from the new total, the upward revision compared with 2010 DWP figures is 743,000.

The DWP has admitted that its revised figures are a response to the decline in the UK's economic fortunes reflected in the Office for Budget Responsibility forecasts in November when they dramatically slashed growth predictions for 2012 from 2.5% to just 0.7%.

The UK slipped into negative growth during the last quarter by 0.2% leading to fears of a double-dip recession and further hikes in unemployment.

A DWP spokesperson said the figures were also released in order to give fair warning to the charities and companies that administer the Work Programme, such as Ingeus-Deloitte, the security company G4S, and Action for Employment or A4e, as they struggle to fulfil the terms of current contracts and get people into jobs.

The main rise in entry to the Work Programme comes for those aged 18-24. The DWP now expects an 83% leap on last year's numbers and a further 71% rise for 2013/14.

The biggest increase in overall numbers is expected to come in 2013/14, when just over a three-quarters of a million extra people are expected to be looking for work under the Work Programme, 362,000 more than previously predicted.

In a statement, the DWP said: "The country faces a changing economic picture as shown by the latest economic and fiscal outlook from the Office for Budget Responsibility. It is only right that we revise our projections for people entering the Work Programme to reflect this."

The new figures also increase worries about the scarring effect that long term unemployment will have on the British labour market and, what politicians have termed, the "lost generation".

Chris Goulden, the head of research and policy at the Joseph Rowntree Foundation, said the figures were worrying, adding: "There's definitely a scarring effect, even for short periods of unemployment and the evidence is worse when you're younger. And protracted periods can start to affect your career later in life."

Paul Gregg, professor of economic and social policy at the University of Bath, who helped coin the phrase "unemployment scarring", was also concerned by the latest figures.

"We know that exposure to significant periods without work leads to long-term damage. We know that the costs of that to the individuals in higher future unemployment, lower wages, health-related problems is very large."

"This recession has been particularly focused on young people, and what is depressing at the moment is that we seem to be entering a second phase of the recession and it is still very much the case that all the pain is being borne by the young."

The revised estimates come as a National Audit report criticised the programme for being "over-optimistic" and said that the programme was only likely to help 25% of those out of work opposed to a government estimate of 40%.

The 32% increase in jobless people entering the Work Programme is likely to put further longer-term strain on the private companies and charity subcontractors that provide the back-to-work schemes, triggering fears that a number could go bust, and potentially putting the entire £5bn programme at risk.

The 18 major contractors face demanding targets – getting more than a third of the programme's projected 3.3 million clients into sustainable work by 2015-16 - in order to activate fees paid to them under the government's payment-by-results model.

Although contractors would receive increased upfront attachment fees of nearly £100m as a result of the higher volumes of work programme clients, the rising influx of new clients, coupled with the deteriorating job market, could force on them massive extra costs that could threaten their financial viability in the medium term.

Work Programme industry experts the Centre for Economic and Social Inclusion said: "The weaker labour market outlook means higher than anticipated Work Programme referrals and a much bigger challenge for Work Programme providers.

"In the short term, income from attachment fees will increase. But in the longer term job outcomes and sustainment payments are likely to be harder to gain than DWP would have expected a year ago." 

The figures also show a projected decrease in the numbers of long-term sick and disabled people entering the work programme.

This is believed to reflect the increasing numbers of incapacity benefit claimants who are found to be unable to work as a result of work capability assessments, as well as an explosion in those who are appealing against what they believe to be unfair decisions that they are fit for work.

The coalition needs to stop the gimmicks and the phoney war over bankers' bonuses and create a viable economic strategy

Here are some facts.

The UK's economy is stagnating and we could be heading for the first double-dip recession since 1975. In the last quarter the economy shrunk by 0.2 per cent, putting annual growth at 0.9 per cent. And although the official numbers are nearly always wrong and may well be revised, the auguries are not good.

Unemployment is at a 17-year high; one million youngsters are out of work, and the Bank of England predicts that the private sector is contemplating more job cuts across just about every industry from banking to haulage.

Still more worrying is the sharp collapse in manufacturing output – down 0.9 per cent, the steepest fall since the start of the recession in 2008. This is the most disappointing news of all as the hope had always been that private companies – and the revival of manufacturing and exports in particular – would pick up the slack from those jobs being lost in the public sector.

So what are the politicians doing? Out to lunch as far as one can tell. Nick Clegg seemed to be the only one with a spine last week, calling for an immediate increase in the tax threshold to £10,000 to reduce the burden for low to middle income Britain. Otherwise our political masters have been either wasting time prattling about Sir Fred Goodwin's gong, or gallivanting around Europe annoying our neighbours. Labour's front bench was equally spineless, spouting off the predictable blame-game stuff while David Cameron made a bad error in showing off his Euro-bashing credentials again.

Why Cameron chose Davos to tick off his fellow European heads of state about the perilous state of their countries is beyond me; it's neither friendly nor helpful at such a fragile time. That he may be right is beside the point, and, if he's not careful, they'll bring back passport control. Instead, the Prime Minister might have been better served had he suggested how the Continent might work together to improve growth and productivity, for that's the only way out of this crisis.

It was this time last year that the Chancellor, George Osborne, also speaking at Davos, urged the UK's captains of industry to start spending the £65bn or so they have squirrelled away for a rainy day. But the UK's industrialists haven't listened to him, and there is more, not less, cash on deposit. New investment in capital and plant is at rock bottom while a lot of British money is flooding overseas, mainly to tax havens if the chaps I've been talking to in Jersey are right.

Why aren't they investing? That's what Cameron and Osborne should be asking. It's too easy to criticise the EU for its punitive workplace regulations when ministers are doing absolutely nothing about reforming our own labour rules. A question of do what I say not what I do, perhaps?

All the industrialists I speak to say they are being clobbered by soaring energy costs and stifling regulations, whether it be new green taxes or tax on R&D investment. More pertinent is the cost of employment for small businesses. There's been nothing to encourage the UK's 4.6 million SMEs to employ more: if each one took on one extra worker, unemployment could be slashed.

We're still in a deleveraging recession, not a destocking one as in previous recessions, so different tactics are needed. Tim Morgan of Tullett Prebon made a good point when he said last week that neither the Government nor Opposition has come clean with the public on one key point – that "every traditional economic policy lever has been tried, and has failed".

We've had low interest rates, devaluation, stimulus and quantitative easing in spades. He's also right to say that relaxing the deficit-reduction plan to spend more will upset the markets, but doing so to cut taxes and boost growth might work. And tax cuts, particularly for low- to middle-income earners, would boost growth and pay for itself.

That's why we need a plan for growth, one which doesn't mean abandoning the deficit-reduction strategy. But if the country does go into a double dip, then spending and welfare payments will go up again and tax revenues will go down. Then it won't be long before the UK's triple-A rating goes down with it.

Part of the problem is that the coalition appears to believe that it has a genuine growth policy. It doesn't. We have a parody of a policy that has been masquerading as one, along with gimmicks like the Mary Portas review to save the high street.

Now is the time for big ideas. The Government should stop the phoney war with the banks over bonuses: if it doesn't approve of Stephen Hester's pay package at Royal Bank of Scotland then it should be renegotiated, not debated through the newspapers. A contract is a contract and should be respected – or changed.

Instead, Cameron and Osborne should get their gloves off over the real issue : lending to SMEs. Then we need bold tax incentives for companies to take on the young via more apprenticeships, tax breaks for R&D, tax cuts for the squeezed middle and serious resources – time as well as money – should be invested in education to ensure we have the best and the brightest.

Osborne has worn his hairshirt well; now it's time to see the true colours underneath. A Plan G would be start.

The Government's austerity package remains "the right thing to do", the head of the International Monetary Fund said today in a boost for Chancellor George Osborne.

Christine Lagarde gave her firm backing to maintaining the deficit-cutting measures, despite the threat of recession and economic forecasts being revise downwards.

Figures released on Wednesday showed the economy shrank by 0.2% in the final quarter of last year - slightly more than anticipated and fuelling Labour calls for a change of course.

The IMF has dropped its forecasts for UK growth to just 0.6% for this year, down from 1.6%, and 2% in 2013, down from 2.4%.

Remarks by its chief economist Olivier Blanchard that the UK might have to consider slowing the speed of cuts if growth proved to be "dismal" were seized on by shadow chancellor Ed Balls as backing for Labour's demands for a change of direction, including a tax cut stimulus.

But asked if she thought that was something the IMF would be happy to see, Ms Lagarde told BBC Radio 4's The World at One: "Our sense is that under the present circumstances the policy that is in place is the right one, and we have said that very explicitly.

"Under the current circumstances, the policy in place that consists of letting the automatic stabilisers move without readjusting and tightening the principles is the right thing to do."

The IMF was "very consistent" about that backing, she said, backing Mr Blanchard's analysis.

"If you ask a top-class academic 'what if?' then of course he has to envisage. But as it stands, under the circumstances and with the automatic stabilisers playing out as they do, this is fine."

Pointing to the 2013 forecast, she added: "Under current circumstances and with the policies that have been designed as they have been, we see a progression of growth.

"That's what's intended and that's what's good."

Thinktank says rich will prosper but 'squeezed middle' will not regain pre-recession earning power for eight years

Millions of ordinary families are unlikely to see their earnings return to pre-recession levels until at least 2020, a report from a leading thinktank has warned. But it predicts that the income of the wealthy will continue to rise over the same period.

The study, which focuses on the state of the "squeezed middle" and is produced by the independent Resolution Foundation, looks at the situation of 10 million adults, who crucially do not rely heavily on means-tested support from the state, and their 5.2 million children.

A report by the foundation last year led to Ed Miliband's championing of the squeezed middle, a part of Britain that the foundation says remains a key political battleground. It says that households without children earn between £12,000 and £29,000 a year to be part of the squeezed middle; homes with children, between £16,000 and £41,000.

On Monday Labour's welfare spokesman, Liam Byrne, will debate the report's implications with Liberal Democrat MP David Laws at the foundation's London offices.

The two have not met since the former Treasury secretary Byrne's infamous note in 2010 to his successor, Laws, which read: "There's no money left." Since then, the UK's economic woes have deepened and the foundation paints a "gloomy picture on incomes for the next decade".

Byrne told the Guardian that Britain risks replicating the US's "lost decade" where the middle class has fallen so far behind the rich that "Time magazine recently wrote its obituary". Byrne said the report underlined the fact that "the government's economic strategy is doing nothing for jobs, which is why wages are stagnating and welfare reforms are doing nothing for working people. The result is inequality between the middle and the top. Working people do not have a government working on their side."

Taking the Office for Budget Responsibility's latest forecasts, the researchers show that if growth remained sluggish for the next eight years the average annual disposable income of people in this crucial electoral battleground, representing a third of the population, would be £20,200 in 2020 – around £1,700 less than in 2007.

It would take growth rates not seen for almost a decade to let incomes in the squeezed middle return to pre-recession levels by 2020.

While such strong, persistent growth might ensure ordinary families recover lost ground, the real winners would be the top half of the country's earners, whose real disposable income would rise by almost 10% by 2020. Even under the slow growth scenario envisaged by the foundation, the top half of society would see incomes rise by 4%.

The report's author, Matthew Whittaker, said there was a "growing inequality of earnings" at the heart of the long-term squeeze. "Members of the squeezed middle did not share in the spoils of economic growth in the pre-recession years, with wages at the median and below stagnating. Gains instead flowed primarily to higher income households and, more particularly, to those at the very top of the distribution.

"If this trend continues once growth returns it may not be just those on low and middle incomes finding themselves left behind in the next decade, but rather the majority of society."

Part of the reason for the disparity in future spending power according to the report is that the incomes of the lower middle class rise more slowly than the rich, with their spending power eroded by fast-rising fuel and food costs. If low- to middle-income households faced the same price rises as higher earners since 2003 in the types of goods they typically buy they would be better off by £427 in 2011.

The report says the squeezed middle also has to cope with a prolonged wage squeeze – with real wages falling 4.2% over the last year – and warns that the most significant cuts to tax credits have yet to kick in. It says that the major recipients of tax credits are facing a further loss of income of nearly half a billion pounds from this April.

According to the report's calculation, this will see 2 million households worse off by £305 in 2012.

Whittaker pointed out that as the coalition's cuts have hit women harder than men, lower to middle-income families are likely to be "hurt twice". There are also dire figures for young people in rented accommodation and for young property owners who had already borrowed too much to get on the housing ladder, leaving themselves dangerously exposed if interest rates rise.

The proportion renting and aged under 35 has soared from 28% to 47% in the last six years alone.

In the same period the number of homes owned by under-35 members of the squeezed middle fell from almost a third from 770,000 to 562,000.

Those with mortgages may be benefiting from record low interest rates, but with one in five signing up to a 100% mortgage before the recession, a quarter of families still spend between 25% and 50% of their income on their mortgage.

Gordon Brown's administration realised too late to do anything about the widening gap. A treasury paper in 2009, obtained by the Guardian, identifies a "squeezed middle" facing stagnant or falling wages since 2004 – believed to be the first official reference to the phenomenon.

To solve this, Brown's Treasury argued in 2009 for removing "low level regulatory burdens" on the industries such as retail and hotels where "squeezed Britain" works. It also suggests finding ways to get 10 hours more per week per household by 2020 by finding ways of making work more family friendly. It controversially called for "the tax and benefit system to transfer £2bn more each year".

Whittaker said the foundation's analysis "shows rising pressure from pretty much all sides".

He added: "continued low interest rates and the start of a fall in inflation offer only limited respite. This will be far outweighed by further deep cuts to tax credits due this April which will come as a shock on top of the continued wage squeeze."

A spokesman for the Treasury said: "The government has taken decisive action to tackle the deficit, which has helped to keep interest rates low for businesses and families. We recognise that people are feeling squeezed and the government is doing what it can to help, reducing fuel duty so taxes on fuel are 6p lower than they would have been, freezing council tax and implementing an increase in the personal allowance in April, taking over 800,000 of the lowest paid out of tax."

Imposing austerity measures as countries slow towards recession is a fundamentally flawed response, said Mr Stiglitz, who won the Nobel prize in 2001 for his work on how markets work inefficiently.

"The answer, even though they see over and over again that austerity leads to collapse of the economy, the answer over and over [from politicians] is more austerity," said Mr Stiglitz to the Asian Financial Forum, a gathering of over 2,000 finance professionals, businessmen and government officials in Hong Kong.

"It reminds me of medieval medicine," he said. "It is like blood-letting, where you took blood out of a patient because the theory was that there were bad humours.

"And very often, when you took the blood out, the patient got sicker. The response then was more blood-letting until the patient very nearly died. What is happening in Europe is a mutual suicide pact," he said.

Keynesian economics, which require governments to help sustain demand, suggests that austerity measures should be imposed when an economy is booming, not waning.

Mr Stiglitz pointed out that 700,000 public sector jobs had been cut in the United States in the past four years, removing demand from the system as unemployment spikes. The UK is set to lose a similar number by 2017.

Instead, Mr Stiglitz argued the best economic medicine is infrastructure spending, especially on transport and energy projects. He pointed to China as one country that had successfully combatted financial crises with stimulus packages.

On Monday, George Osborne had told the same forum that the UK's fiscal austerity measures, which have been in place for a year and under which the economy has begun to tip into recession, were the only way to convince the market of the UK's economic credibility.

"When you have a high budget deficit, if you do not have a [disciplined fiscal] plan then you will not have sustainable growth because investors will be worried about investing in your country," the Chancellor said.

However Mr Stiglitz argued that austerity in the UK and elsewhere would not boost confidence. "There will not be a restoration of confidence as long as economies keep falling, and that will continue until [politicians] change economic course. And I do not think that is likely," he said.

Mr Stiglitz said economists are now not debating if the Euro will break up, but how and when it will happen.

"Among economists the discussion is about the best way to end the euro. It could be civilian upset that does it. Youth unemployment in Spain has been over 40pc since 2008. How much longer will they tolerate that? The policies of the new government are for more of the same medicine, except worse.

"The other way it may end is when the European Central Bank refuses to be the lender of last resort for some countries, precipitating a crisis. We can be sure that markets will be highly volatile and the end of the Euro will be a very severe disruption to the global economy," he said.

However, he compared the strictures of the single currency to the gold standard, and noted that countries which had abandoned the gold standard early had recovered more quickly.

"When the Euro was founded, most economists were skeptical," he said, noting that the single currency was a political project that had not satisfied the optimum conditions for a currency bloc. "They hoped they would be able to finish the project over time, but the politics was not strong enough," he said.

Mr Stiglitz also said that while he was critical of the ratings agencies, a decision to downgrade the European Financial Stability Fund (EFSF) on Monday was reasonable. "The EFSF was trying to leverage something out of nothing, and that was never going to work, and they were just saying that it wasn't going to work," he said.

The leaders of the International Monetary Fund, the World Bank and the World Trade Organisation on Friday issued a warning about the economic and social risks of austerity programmes in a "call to action" designed to boost growth and fight protectionism.

Expressing concern about the weakness of economic activity and rising unemployment, the IMF's Christine Lagarde, the World Bank's Robert Zoellick and the WTO's Pascal Lamy joined the heads of eight other multilateral and regional institutions in calling for policies to create jobs, tackle inequality and green the global economy.

"The world faces significant and urgent challenges that weigh heavily on prospects for future growth and on the cohesion of our societies," said the statement by the global issues group of the World Economic Forum. It was published ahead of the forum's annual meeting in Davos next week, amid concerns that 2012 will see the global economy flirt with recession as a result of the eurozone crisis.

"Our shared objective is the strengthening of growth, employment and the quality of life in every part of the world," said the statement. "But entering 2012, we worry about: decelerating global growth and rising uncertainty; high unemployment, especially youth unemployment, with all its negative economic and social consequences; potential resort to inward-looking protectionist policies."

In addition to Lagarde, Zoellick and Lamy, the signatories were Mark Carney of the Financial Stability Board, Margaret Chan of the World Health Organization, Angel Gurría of the Organisation for Economic Co-operation and Development, Donald Kaberuka of the African Development Bank, Haruhiko Kuroda of the Asian Development Bank, Luis Alberto Moreno of the Inter-American Development Bank, Josette Sheeran of the United Nations World Food Programme, and Juan Somavia of the International Labour Organisation. The forum said it was the first time the heads of the world's major institutions had come together in such a way.

Reflecting the IMF's concern about over-aggressive deficit reduction programmes, the joint statement said governments should "manage fiscal consolidation to promote rather than reduce prospects for growth and employment. It should be applied in a socially responsible manner."

The 11-strong group said it wanted to see a comprehensive action plan that could be agreed and implemented at the meeting of the G20 gathering of developed and developing nations in Mexico in June.

"We call on leaders to devote the necessary political energy to deliver concrete actions to exit the crisis and boost growth. Every country, working through its regional economic organisations and development banks and through the international financial and UN institutions, has a role to play."

While acknowledging that the global economy faced severe challenges, the action plan said momentum could be regained by increasing spending on infrastructure and by "beginning to realise the promise of a greener economy". To do so, the world would need an open trading system, resilient cross-border finance, sustainable government finances, determined and coordinated structural reforms and measures to address inequalities in all countries.

In the short term, the 11 leaders said the two most important challenges were to solve the sovereign debt and banking crisis and to restart growth. It urged the implementation of new, tougher regulations for finance and the rapid recapitalisation of banks where necessary.

With more than 200 million people currently unemployed around the world, the call to action said policymakers should "address youth and long-term unemployment to provide decent work prospects, along with country-specific structural reforms that are fairly implemented to achieve faster growth. Through dialogue, labour market reforms can be agreed that can both raise employment levels and ease fiscal adjustment."

It added: "Boosting jobs and investing in human capital is the most promising way of tackling inequality. We support the work of the ILO and others in assisting governments to examine realistic policy options, including cost-effective social policies to cushion the most vulnerable from adversity. Investment should target skills and education and thus equip people for the future.

"Rising inequality calls for heightened consideration of more inclusive models of growth. We must deliver tangible improvements in material living standards and greater social cohesion."

The call for action urged governments to resist the temptation to resort to trade barriers in an attempt to safeguard jobs. "Countries must reaffirm that none will resort to growth-destroying protectionism and demonstrate that trade restrictions introduced in response to the economic crisis will be rolled back."

The World Bank has warned that the crisis in the eurozone will lead to a sharp slowdown in growth in rich and poor countries this year and could spiral into a rerun of the 2008-09 recession.

In its half-yearly health check on the global economy the Washington-based institution said the world had "entered a very difficult phase characterised by significant downside risks and fragility". The bank lowered its forecast for global growth in 2012 from 3.4% to 2.5% but said governments should be preparing for a downturn as bad as that which followed the collapse of Lehman Brothers in 2008.

"An escalation of the crisis would spare no one," said Andrew Burns, manager of global macroeconomics at the World bank and the report's author. "Developed and developing country growth rates could fall by as much or more than in 2008-09. The importance of contingency planning cannot be stressed enough. It is clear that whatever probability is attached to this downside scenario, it has increased since June last year.

"Developing countries should hope for the best and plan for the worst. If these downside risks materialised there is not much developing countries can do to prevent it. But they can prepare for it." He added that such countries should be drawing up list of public spending priorities and stress testing their banks.

The forecasts contained in the half-yearly Global Economic Prospects report reflect the slowdown in the global economy seen in the second half of 2011, which was already evident in weakening trade flows, declining capital flows to developing countries and lower commodity prices. A similar picture is likely to be painted by the bank's sister organisation, the International Monetary Fund, when it releases updated predictions for global growth next week.

The bank said the eurozone was already in recession and was likely to contract by 0.3% this year. High-income countries would grow by 1.4% as a result of a recovery in Japan from a tsunami-affected 2011 and a slight pickup in activity in the US. Even so, rich countries are expected to grow in 2012 at only half the 2.7% expected when the Bank last published forecasts in June 2011.

It added that there had also been a slackening in the pace of activity in some of the leading developing countries – such as Brazil, India and Turkey – as a result of action taken by governments to tackle inflation. There was a risk, the bank said, of the crisis in the eurozone and weaker growth in developing countries reinforcing each other at a time when the ability of policymakers to respond to a downturn was much diminished compared with three years ago.

"While contained for the moment, the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains," the World Bank report said. "In particular, the willingness of markets to finance the deficits and maturing debt of high-income countries cannot be assured. Should more countries find themselves denied such financing, a much wider financial crisis that could engulf private banks and other financial institutions on both sides of the Atlantic cannot be ruled out. The world could be thrown into recession as large or even larger than that of 2008-09."

A second global downturn would again have its epicentre in high-income countries, it said, but it added that developing countries would feel its effects deeply through trade, commodity prices, remittances, financial pressures and capital flows. Many developing countries would see outright falls in output and overall developing country gross domestic product in 2013 would be more than 4% lower than in the bank's baseline projection.

"In the event of a major crisis, activity is unlikely to bounce back as quickly as it did in 2008-09, in part because high-income countries will not have the fiscal resources to launch as strong a counter-cyclical policy response as in 2008-09 or to offer the same level of support to troubled financial institutions. Developing countries would also have much less fiscal space than in 2008 with which to react to a global slowdown (38% of developing countries are estimated to have a government deficit of 4% or more of GDP in 2011). As a result, if financial conditions deteriorate, many of these countries could be forced to cut spending pro-cyclically, thereby exacerbating the cycle."

The co-ordinated global response to the 2008-09 slump saw interest rates slashed, money created through quantitative easing, public spending increased and taxes cut. "Monetary policy in high-income countries will also not be able to respond as forcibly as in 2008-09, given the already large expansion of central bank balance sheets," the Bank said. "Among developing countries, many countries have tightened monetary policy, and would be able to relax policy (and in some cases already have) if conditions were to deteriorate sharply."

Burns said China had the resources and the political will to mount a counter-cyclical policy, but was unlikely to be able to boost its economy as quickly as it did three years ago. "There was a big response in 2008-09 but it is not obvious that the same mechanisms can be used as effectively as they were in 2008-09. Those parts of the economy that were stimulated in 2008-09 are already over-heating."

A wipeout in its equity derivatives business helped push Citigroup's investment bank into the red, presaging grim news for staff awaiting their bonuses.

It reported results yesterday that missed even analysts' reduced forecasts and suggested Citigroup is suffering more deeply than most from the malaise affecting investment banking.

Its miserable results came a day before Goldman Sachs reports its latest quarterly numbers, and amid reports that another rival, Morgan Stanley, has told staff immediate cash bonuses will be capped at $125,000 (£81,400).

Like other Wall Street bosses, Vikram Pandit, Citigroup's chief executive since 2007, put the blame on the macro-economic environment and in particular the eurozone debt crisis. But the figures showed that his bank's problems extended beyond the bond-trading desks which have been hurting all across the industry.

Citigroup's fixed-income revenues fell 25 per cent, year-on-year, in the final quarter of 2010, but equity trading revenues slumped 71 per cent. The securities and banking division as a whole, which encompasses trading and deal advisory work, produced 29 per cent less revenue in the quarter and ended $163m in the red.

In early trading on Wall Street, the shares fell more than 5 per cent.