Hamish McRae: Steady your nerves, for this painful economic recovery could take years

Economic Life: Given the generally sombre outlook, you would hardly expect consumer sales to be booming, but they have not been bad this spring and summer

Yes, but what about the economy? There has been so much noise this week about the Comprehensive Spending Review that the muted signals from the real economy have been drowned out. The signals, as usual, are conflicting but, taken together, they should not give great cheer to the Chancellor or indeed to the rest of us.

Start with the good, or at least not too bad, news. The trends in corporate lending seem to be turning a corner. The Bank of England publishes a useful little study called Trends In Lending and the latest one was out yesterday. Its broad messages are that, for companies, lending conditions are improving slowly (particularly for larger ones), that mortgage supply remains tight and that consumers are still paying back more than they are borrowing.

As far as companies are concerned, the net monthly flow of funds has gone positive at last: new borrowings were greater than repayments in August, the latest month for which figures are available. Coupled with this, there is a growing perception among financial officers that credit is getting cheaper and more available, as you can see from the first graph. But smaller companies are still complaining about the difficulty of obtaining credit and for them, conditions remain tight.

For home buyers the picture is much as before, with the big British-based lenders maintaining their flow of new lending but the fringe and foreign lenders that had been doing about half the lending during the boom remaining completely out of the market. Allowing for mortgage repayments, the net monthly flow of funds into mortgages is minimal. And consumer lending? If you add together credit cards, consumer loans and overdrafts, net lending is still negative. Borrowing on credit cards has been increasing but this is more than offset by the fact that the amount borrowed on consumer loans and overdrafts has been falling. So, in as far as the economy has been growing, it certainly has not been a case of demand being propped up by borrowing. Credit is still pretty tight.

Given this, and the generally sombre outlook, you would hardly expect consumer sales to be booming but actually they have not been at all bad throughout the spring and summer. However, in the past two months the volume of sales has slipped. Year on year they are still up, but only by 0.5 per cent. Since you would actually expect them to be reasonably strong through to the end of the year ahead of the increase in VAT, this wobble is discouraging. The middle graph shows this slither back towards zero growth.

But for George Osborne and his colleagues the most worrying thing must be the poor borrowing figures for September, and in particular the rather weak trend is revenues. These came out on the day of the spending review so they rather escaped attention, but the big number is £17.2bn, the highest-ever borrowing for any September, and nearly £2bn more than in September last year. One number I particularly dislike is that we spent £2.3bn on interest in September compared with only £900m in the same month last year.

We look at this stage to be almost exactly on the target for borrowing set out in the Budget, which would be fine were it not the case that in the early months of this financial year we seemed to be heading for lower borrowing, whereas now we may be heading for higher. You can catch a feeling for what is happening from the two smaller graphs: monthly spending is running higher than last year and in the early part of this year tax revenues were up decently too. But recently they have not been so buoyant, for although VAT is bringing in a lot more money (as you would expect given the return to 17.5 per cent), income tax is only up a tiny bit. That is odd because employment is higher. You should never read too much into any one set of figures, but there is a real danger that once again the Treasury is overestimating tax yields.

And that perhaps is the weakest part of the whole spending review strategy. Second thoughts are usually better than immediate reactions, and all the emphasis when the review was unwrapped was on the cuts side. That is totally understandable because that was the new information. But the more I look at the projections for revenue, the more twitchy I feel.

There are two potential weak areas. One is the growth assumptions – the idea that the forthcoming growth phase will be a strong one. The other is that it will be possible to sustain a tax take that is actually slightly higher as a proportion of gross domestic product than has been achieved at any time since the early 1980s. We will get the verdict of the Office for Budgetary Responsibility in the next few days but the National Institute for Economic and Social Research is voicing some concerns about the growth assumptions and its view should be taken seriously. As for the tax take, governments can always increase tax rates, but getting more revenue depends on the extent to which people adapt their behaviour to the changed incentives and disincentives.

The general conclusion that most market commentators are making is that, in the light of this tight fiscal policy, monetary policy will have to remain loose, maybe very loose. That is where the argument will go next. We know from its latest minutes that the Bank of England's Monetary Policy Committee is split three ways, which suggests that the "no change" stance will remain for a while yet. We know that the US Federal Reserve will spray some more money around and there will be pressure on the Bank to do likewise. The weakness of sterling in the past few days suggests that the markets expect another bout of quantitative easing here too.

But we should take a little comfort from that Trends In Lending report, for it does suggest that some sort of turning point has been reached in commercial lending. As for mortgage and personal lending, at least both are more or less stable, which is a healthier state of affairs than at the height of the boom. It is almost impossible to say to what extent low borrowing is the result of lenders clamping down or borrowers holding back. Either way, it is sensible to expect consumption to be flat next year, particularly given the rise in VAT, and it is quite probable that property prices will be pretty flat too. But that is all what you would expect at this stage of the cycle: 2011 will be part of a long climb back to full output.

The big point surely is that growth is the key. If we get decent above-trend growth, all the numbers begin to look much better. Private-sector employment rose strongly in previous periods of fiscal cutbacks here and elsewhere in the world and, as that climbs, revenues ought to follow.

We are after all still in the early stages of a global recovery that on past form should last several years. There is such a thing as the economic cycle, but expect several nervous months ahead.