Land of confusion

In July we witnessed one of the most positive and long lived rallies in stock market history, with the FTSE 100 breaking out off its trading range between 4000 and 4500, reaching (briefly) 4700 on Monday 3rd August. Over a month this was a rise of around 13% and in increase of 33% from the lows reached in early March.

In the meantime an increasing number of commentators are hailing the emergence of positive economic news. Yet perversely the Bank of England has just announced a £50 Billion extension the Asset Purchase Scheme (otherwise known as QE, or Printing Money) accompanied by a distinctly cautious statement.

So what is going on? And while we wish the economy a speedy recovery it is wise to maintain a cautious position.

First, the optimistic notion of a few months ago that we might see a return to growth in the UK in the second quarter of 2009 was comprehensively rebuffed by the actual figures. These indicated a further fall of 0.8%, resulting in a total decline in GDP of 5.7% over five quarters. However there have been strong signals that we could see positive numbers for the third quarter with industrial production showing the largest monthly gain in over two years and the service sector also showing signs of improvement.

The Bank of England however remain cautious, balancing the good news with a realistic appreciation of the issues we confront, as can be seen from the following extracts from the latest rate decision statement:

“The world economy remains in recession, though there have been increasing signs that output in the U.K.'s main export markets is stabilising. Financial market strains have eased and banks' funding conditions have improved a little, although financial conditions remain fragile. Household and business confidence has picked up, albeit from the very low levels experienced in the wake of the financial crisis last autumn.

In the U.K., the recession appears to have been deeper than previously thought. Gross Domestic Product fell further in the second quarter of 2009. But the pace of contraction has moderated and business surveys suggest that the trough in output is close at hand.

Underlying broad money growth has picked up since the end of last year but remains weak. And though there are signs that credit conditions may have started to ease, lending to business has fallen and spreads on bank loans remain elevated.”

 And “The margin of spare capacity in the economy increased further and pay growth remained weak. The future evolution of output and inflation will be determined by the balance of two sets of forces.

On the one hand, there is a considerable stimulus still working through from the easing in monetary and fiscal policy and the past depreciation of sterling. On the other hand, the need for banks to continue repairing their balance sheets is likely to restrict the availability of credit, and past falls in asset prices and high levels of debt may weigh on spending.”

And on this crucial latter point we agree. The official figures tell us that banks aren’t increasing lending, despite protestations to the contrary. This is highlighted by the latest figures from Lloyds Group, which indicate that business lending to non-financial companies has actually fallen as have loans to private customers. Furthermore the bank is planning to shrink credit available over the coming years.

The reality is that any recovery in economic fortunes is likely to be anemic at best. Unemployment, traditionally a lagging factor, will continue to grow while the country’s collective debt burden continues to weigh on us. So by all means let us celebrate that the worst of the declines are behind us but agree that the outlook remains uncertain

And finally……

Three men married wives from different countries.

The first man married a woman from China. He told her that she was to do their dishes and house cleaning. It took a couple of days, but on the third day, he came home to see a clean house and dishes washed and put away.

The second man married a woman from Italy. He gave his wife orders that she was to do all the cleaning, dishes and the cooking. The first day he didn't see any results, but the next day he saw it was better. By the third day, he saw his house was clean, the dishes were done and there was a huge dinner on the table.

The third man married a girl from England. He ordered her to keep the house cleaned, dishes washed, lawn mowed, laundry washed, and hot meals on the table for every meal. He said the first day he didn't see anything, the second day he didn't see anything but by the third day, some of the swelling had gone down and he could see a little out of his left eye, and his arm was healed enough that he could fix himself a sandwich and load the dishwasher.