America leads the recovery

THE American economy may yet lift us all out of the doldrums after all. A sharp expansion in growth in the second quarter caught Wall Street by surprise and suggests the 'Baghdad bounce' may be more durable than thought.

US output climbed 2.4% in the three months to the end of June, a far more robust outcome that in the two previous quarters. The main driver was government spending which surged 25.1% fuelled by the military. This was the biggest gain in defence spending since the Korean War in 1951. All of this was enough to produce a muscular Dow Jones rally.

Contrast this with what is going on in Europe. The OECD sees the start of what could be a tentative recovery but is not confident. This year is a write- off in terms of growth. The Stability and Growth pact has been breached so many times that it is hardly worth the paper it is written on and there is no chance of the public sector taking up the slack.

What may be most worrying to euroland is the observation by the OECD that internally-generated trade and growth is stagnating. Being part of this internal growth was one of the few positive messages to emerge from Gordon Brown's heavyweight studies on Britain and the euro.

The nervousness of the OECD about euro prospects is reflected in its 2004 forecast reduced to 2% from 2.4%. Despite significant cuts in interest rates over the last year to 2% the OECD clearly worries that stagnation could persist. It recommends that the European Central Bank be ready to reduce rates again should there be further ossification, although yesterday it sat on its hands again and left rates unchanged.

There is not much in the OECD's report to make British entry into euroland before the next election attractive. Far from it. British growth between now and 2008, at a an average of 2.5%, is seen as running ahead of euroland at far lower levels of unemployment.

Rod's pain
NO sooner than Rod Eddington had cut himself free from the unions with one swipe than he was back at the check-in counter seeking to convince the City that the first-quarter results could have been much worse. But how does BA put a gloss on a pretax loss of £45m and estimated losses of up to £40m on the wildcat strike.

All it can do is point to the positive. The cost picture is far better and allowed the group to make an operating profit of £40m. Its worst is better than the best of rivals like KLM. But revenue remains a serious problem, particularly for premium traffic on which BA has bet so much of the future. Until economic recovery is better entrenched it will remain backs against the wall time.

The drive to implement low costs will go on despite the rumble with the GMB union. There are another couple of thousand jobs to be hacked away and the company is looking at everything from online bookings to a ceiling on capital expenditure to limit damage. Cost reductions can only keep financial crisis at bay. Full recovery for the group and its shares will not happen until traffic and revenue revives.

Much of that is beyond its control but BA did not help itself by staging a July confrontation.

Halifax halo
WHEN it was a simple building society Halifax had a reputation for running the most cost-efficient operation in the financial sector. Rivals would dismiss its performance, arguing that this was easy because it was essentially a one product mortgage company. No one can say that any more since the merger with Bank of Scotland and a host of peripheral acquisitions.

The fear must always be that HBOS is on some kind of Abbey National spree - snapping up every financial company in sight but not having a clue of where it is going. At present there is to be no fear of that. Halifax continues to bear down on expenses with the cost income rate sharply down at 42.1% against 45.2% . Just as importantly James Crosby, chief executive, has brought direction to HBOS. Rather than just be another clearing bank it tries to be innovative by offering interest on current accounts, simple insurance products and now a premium card 'extra' that provides the same services as the Big Four, but at no cost. HBOS is well on target to meeting promise of 1m new current account customers this year.

If there is a worry at HBOS it is about its corporate banking and exposure to property, energy and entrepreneurs such as Philip Green and Richard Desmond. All the signs are that the latter have been paying down their debts and that the rest is well provided for.

So far so good for the fifth force in British banking.