This morning we found out how much the UK economy grew during the first quarter of 2010. Analysts’ consensus had been around 0.4%; however, on the day the figure came in at a disappointing 0.2%. Oddly enough rather than being disappointed the market rallied on the back of this news. We assume this is because it had already decided that if the figure were to be too low it would be a false signal and would be revised up anyway (evidence, if any more were needed, that the theory of efficient markets is nonsense. If you expect the figure to be too low and the market to rally in expectation of revisions, the market should rally before any data is released. Still, best not to let logic get in the way of a good theory).

Anyway the market is probably correct; the first release is always based on a limited data set that is extrapolated out, with most of the hard data coming from the beginning of the period, which in this case was marked by the chaos of a real winter. Politically the read across is interesting. If taken at face value, after all the stimulus that’s been thrown at the economy, it continues to beg the question of why DC doesn’t just point at GB and shout “he’s bankrupting us”, whilst also allowing GB to argue that stimulus can’t be removed as the economy is still too weak. On the positive side industrial output is up but this cannot disguise that overall GDP remains more than 5% below its peak in 2008.

Greece

After prevaricating for weeks the Greek government has finally admitted defeat and formally asked for the joint EU/IMF rescue package to be rolled out. If implemented (not a guarantee as court action against it is almost guaranteed within Germany) this at least buys some time as it funds Greece for a year. This had to happen after Greek 2 year bonds were pushed to a yield of 10%, imposing a crippling rate of interest. Already this news has had a positive impact on the US market, with the newswires continuing to take a panglossian view of the world, but so many questions remain unanswered.

For instance, we discovered yesterday that Greece’s deficit was worse than stated after the figures were re-examined, as were Ireland’s, which had a whopping 14.3% deficit last year. This begs the question that with a number of other EU states on the verge of needing rescue, how can these nations contribute to the Greek rescue package? Furthermore, as discussed in a previous entry, by dragging all the states in together we have seen yields on German Bunds increase as the markets start to price in higher risks.

Worse still, after all the grubby allegations surrounding Goldman Sachs, commentary this morning indicates some Greek banks and other market counterparties were buying Greek debt aggressively prior to the announcement of the rescue plan, indicating that some may have been tipped off and given time to front run the market. Just rumours at the moment but they may have legs.

In the end most of the fundamental issues discussed in the past have not gone away. Although this step may buy time it feels a bit like a very slow motion version of the desperate attempts of the UK government in 1992 as it tried to stave off the inevitable departure from the ERM and the devaluation of the pound.

And just to make sure we don’t feel too clever watching from the UK, a leading fund manager yesterday announced he had crunched some figures and reckoned that without massive government cuts and radical steps (going further than DC’s idea of increasing the retirement age by a year) the UK will have to begin defaulting on its pension, health and welfare commitments within two decades. Sobering stuff!

And finally....

A little boy wanted £100 badly and prayed for two weeks but nothing happened.
Then he decided to write GOD a letter requesting the £100.
When the postal authorities received the letter addressed to GOD, UK, they decided to send it to Gordon Brown.
The PM was so impressed, touched, and in total agreement, that he instructed his secretary to send the little boy a £5 note.
Gordon thought this would appear to be a lot of money to a little boy.
The little boy was delighted with the £5 and sat down to write a thank you note to GOD, which read:

Dear GOD,
Thank you very much for sending the money, however, I noticed that for some reason you had to send it through Parliament and, as usual, that lot deducted £95!