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Chancellor intends to reassure the Commons that authorities will ensure plans are in place to cope with a new credit crunch George Osborne will insist that the government is sticking to its tough deficit-reduction programme when he updates MPs tomorrow about the turmoil in the global economy. Treasury sources said the chancellor intends to reassure the Commons that the UK authorities will be increasing their vigilance over the country’s banks and ensuring that contingency plans are in place to cope with the effects of a new credit crunch. In the aftermath of disappointing official figures for manufacturing and exports released on Tuesday, Osborne will also make it clear that the coalition intends to reform the supply side of Britain’s economy to boost growth. “The chancellor will give parliament an update on what has happened, on the discussions he has had and what we need to do domestically, internationally and in terms of contingency planning”, the source said. Osborne will step up the pressure on the 17-nation eurozone to implement in full the package agreed last month to safeguard the single currency, but will warn that European leaders need to go further to get ahead of the financial markets. He will also urge the G20 group of developed and developing nations to agree ways of rebalancing the global economy so that steps taken by debtor nations to rein in their budget deficits are matched by measures from creditor nations to boost demand. The chancellor believes that the global imbalances were a prime cause of the financial and economic crisis that began in 2007 and that progress in tackling them has been “frustratingly slow”. Thursday’s statement will follow what is expected to be a gloomy assessment of the state of the economy from the Bank of England . Threadneedle Street’s quarterly inflation report will downgrade the Bank’s forecasts for economic growth and the City will be looking for signs that Sir Mervyn King and the eight other members of the monetary policy committee are warming to the idea of a second bout of quantitative easing, or electronic money creation. Osborne believes that his tight grip on the public finances will provide scope for the Bank to use more QE in the event growth continues to be sluggish over the coming months. His approach, however, will be challenged by Labour, which this week accused the chancellor of “breathtaking complacency”. Ed Balls, the shadow chancellor is flying back from his holiday in the French Pyrenees. A Labour source said: “We want Osborne to explain what he has been doing over the last year – not just the last week – to push for a long-term solution to the eurozone’s problems and lead the debate on how we get the global economy growing again “He also needs to explain why he complacently thinks Britain is a safe haven when the FTSE 100 has fallen by so much over last fortnight with billions of pounds wiped off value of British companies and when the UK economy has barely grown for nine months – well before the problems of recent weeks – choking off the recovery we were starting to see last year.” Figures released by the Office for National Statistics showed scant evidence of the rebalancing of the economy towards manufacturing and exports desired by the Treasury. Osborne believes the UK has to be less dependent on consumer and public spending and shift focus towards boosting production, but the ONS said factory output fell by 0.4% in June while the trade gap widened. Analysts had been predicting a small rise in manufacturing output following the disruption caused by bank holiday shutdowns in late April and early May and by the problems caused to the supply chains of multinational companies by the Japanese tsunami. Manufacturing production was down by 0.5% between the first and second quarters of 2011 – a better guide to the underlying trend than one month’s figures – and is almost 8% down on its level five years ago. Industrial production, which includes the energy sector and Britain’s North Sea output, was flat in June but dropped by 1.6% in the second quarter. The ONS said the data was not weak enough on its own to warrant a cut to the estimate made last month that growth between April and June was 0.2% higher than in the previous three months. City hopes were also confounded that the trade gap would be trimmed by the boost to exports from a strong pound and a lower import bill caused by weak consumer spending. The UK’s trade deficit in goods and services increased from £4bn in May to £4.5bn in June, while the deficit over the quarter rose from £8.5bn to £11.3bn. In the three months to June, Britain had a deficit of £24.6bn offset by a surplus of £13.3bn on trade in services. Economic growth (GDP) Economics Government borrowing FTSE Manufacturing data Bank of England Quantitative easing European debt crisis Banking Credit crunch Market turmoil Financial crisis Larry Elliott guardian.co.uk