I hate to sound like a husband, patronising the wife over the household finances, but Darling, you have got your sums wrong. I am, of course, referring to the would-be intellectual colossus, the ex-Transport Secretary, Alistair Darling, who on promotion to the Exchequer was left holding the 'parcel' when the music of markets, liquidity, stopped. Just a first few months after moving into Downing Street, Darling has found himself Chancellor of a UK balance sheet ruined by bank bailouts and 12 years of the government spending beyond its means.
So last month's confirmation that UK GDP contracted 1.9% in Q1 after falling 1.6% the previous quarter was the final nail in the coffin of Darling's forecasting credibility. In fact, the government’s official predictions for growth differ so much from the forecasts of the IMF and other respected institutions; you could fit one of Darling's late trains between them, from his ineffectual time at the Department of Transport.
The contraction in the first quarter was the worst 3-month decline in economic output for 30 years with manufacturing, down a deeply worrying 6.2% despite the weakness of Sterling over the quarter, relative to the year before, which should have aided exports.
As soon as the data was being described as "dreadful" by seasoned commentators, you could just sense the government's public relations machine repackaging the latest batch of political clichés; "global recession" and "unprecedented times". I know there's a recession Darling, but did you or your neighbour, Gordon Brown, think to save any pennies over the past 12 years, when the country was enjoying growth, so you had a bit saved away for when the household finances worsened?
Moving from government to markets, the most recent week saw FTSE close higher, tracking US equity gains. The better than expected UK banking sector updates also supported sentiment. The headline UK index has now progressed around 13% in the 5 weeks to-date during Q2.
Inevitably some sectors continue to fair better then others. Resource and financial stocks continue to out-perform house builders, property and industrial related equities. This trend, many commentators suggest, is likely to continue with key analysts, Goldman Sachs and Morgan Stanley, downgrading leading property companies or advising clients to sell, whilst house builders remain vulnerable on the expectation that the sector will need further injections of capital to strengthen beaten-up balance sheets. News that house prices declined 1.7% in April (Halifax data) also encouraged equity investors to allocate cash elsewhere on the presumption that the UK property market may be the last sector to enjoy a recovery.
On a more upbeat note regarding the affordability of homes, the sharp decline in prices over the past year, (17.7% lower) has improved the house prices to earnings ratio, which is now at a 6 year low of 4.26 according to Halifax. Lower interest rates have certainly helped but with rising unemployment and mortgage availability still not back to normal (pre-Lehman) levels the picture for the rest of 2009 is mixed at best.
Other UK specific news included a hold on interest rates. The Bank of England Monetary Policy Committee opted for no-change to the current rate of 0.5% but did announce an expansion of the £75 billion quantitative easing program adding a further £50bn to help the UK recover from the “deep recession”. The BoE also indicated that it did not consider inflation to be a threat hinting borrowers can expect to enjoy low interest rates for some time yet, certainly into 2010, based on current data.
Look forward, the FTSE is likely to track the S&P 500 pretty closely so the wealth of diversified UK equity investors remains at the mercy of US market sentiment. However, only the most pessimistic market analysts suggest the current rally is a false dawn, and predict a return to new fresh lows. The consensus forecast predicts flat performance or further gains through Q2, with inevitable bouts of short-term profiting taking when markets progress too-far, too quickly.