Double dip fear eases as shares boost optimism
It is a funny time isn't it? We have had all the troubling news from Egypt and we have seen the consequences of that in the oil price and on inflationary expectations worldwide.
We have had mixed news on the economy here in Britain, for as we were still digesting the initial estimate of a fall in GDP in the final quarter, an upbeat survey came in on service-industry expectations. But we still have little feeling for the impact of the rise in VAT.
Elsewhere in the world, the news was mixed as well. There was a sort-of hint from the European Central Bank that it might start to increase interest rates soon, something that will send a shiver through the ‘Club Med’ economies, but German growth numbers were strong. There was slightly better sentiment in the bond markets too. In the US, there was an unexpected fall in unemployment, but not much sign that the optimism of large companies was spreading to smaller ones.
So, a mixed bag. But what struck me as really interesting was the way in which share prices around the world managed to do quite well. The FTSE 100 share index is really more driven by global conditions than by what is happening in the UK, and it managed to clamber back to within a whisker of the 6000 level. But it would have been hard to do that if British economic prospects were that grim. Put it this way: we all may feel twitchy about the economic outlook and we are probably right to do so, but shares at least are not signalling a double dip.
So what are they trying to say? There are several messages you can read into their behaviour. One is that the global recovery is broadening and deepening and the UK will inevitably get some lift from that. British manufacturers are generally cheerful, both in their responses to surveys and in the evidence they give to anyone who troubles to go out and talk to them, including the Bank of England's agents.
A second message is that while high commodity prices and oil above $100 a barrel may have troubling implications for inflation, at least mining and oil companies seem to be doing well out of it.
Those are two sectors heavily represented in the FTSE index. A third is that there is a lot of money around and it has to go somewhere. I suppose you might say that the traditional view that bonds are the safe haven and shares are risky is being turned on its head. Central banks may not be worried about a resurgence of inflation but investors certainly are. Overlaying this, for British investors at least, is a sense that even if the recovery were to falter, they would be able to look through the dip to the climb beyond.
There is a growing body of opinion that the Bank will act earlier than expected, with an increase as early as this coming week not totally ruled out.
My own feeling is that this is most unlikely, for you really need to see what the rise in VAT does and to what extent the GDP figures are revised before doing anything. But the rumblings about a rise in interest rates do fit with the generally positive mood of shares. I don't think it is sensible to confer on to share markets any great collective wisdom. But they do frequently signal turning points. Right now they are not signalling a double dip in the developed world taken as a whole, and not really in the UK either. We should take comfort from that.