Should anxiety underlie the Index?

How to make sense of the latest economic data? Two months of rising share values had most analysts pronouncing the end of the recession, and second-quarter figures confirmed recovery in Japan and Germany.

Unfortunately, that only served to highlight the relative weakness of the UK where the economy continued to contract in the second quarter, albeit at a slower rate (-0.7%) than predicted.

Other signs appear contradictory. The Engineering Employers Federation is no guide to travel trends, but its report that 47% of firms saw an increase in the cost of finance in July and August – up from 44% in April-June and 37% in January-March – is a concern, suggesting little relaxation in credit.

Indeed, Bank of England data showed the largest fall in bank credit on record – that is, since 1997. At the same time, UK households repaid more than they borrowed for the first time since records began in 1993. Consumers clearly recognise unemployment is only going to rise – though you do wish someone kept records a bit longer.

Separate figures showed businesses slashing investment at the fastest rate since 1966 and three times that forecast by economists. Yet the FTSE flew high in July and August before falling sharply at the start of this week.

The Travolution Index – showing the combined value of travel companies listed on the London exchanges – has broadly tracked the FTSE all summer, falling back from late August. Any interpretation should be tempered by knowledge that September is traditionaly a bad month for markets. However, one analyst revealed the underlying anxiety by describing the summer share rally as: “The most speculative momentum-driven equity market since the early 1930s”.

Perhaps most worrying, no one has a clue whether the Bank of England’s policy of quantitative easing – pumping £175 billion into the economy – is having any effect. The Bank’s deputy governor admits: “It will be difficult to draw firm conclusions even in some years time.”

That won’t help the trade in a market where exchange rates may prove make or break, dismaying those who hoped for a recovery of sterling by the autumn.


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