In search of the seeds of recovery

By ALEX BRUMMER, CITY EDITOR
Updated:

After months of dour economic news and falling stock markets around the world, spring has seen a search for signs of recovery.

Among the indicators which have cheered the London markets have been a surprise rise in the Nationwide house price index, signs of an improvement in credit conditions (as reported by the Bank of England) and the generally positive reaction to Gordon Brown's G20 London summit.

All of this was enough to spark a 12.5 per cent rally in share prices, from an admittedly very low point, some of which already has been taken back. But how confident can we be that the worst of the recession is over?

Certainly, the government has taken unprecedented steps, along with most of its allies in the advanced countries, to make sure that 2008 does not come to be seen as another 1930 when governments failed to take the decisive actions to avoid a devastating downturn.

In Britain the Bank of England has cut official interest rates to the bone and embarked on a brave programme of printing money (quantitative easing) designed to unblock the supply of credit.

Green shoots: Nationwide reported a rise in its house price index

Green shoots: Nationwide reported a rise in its house price index

The government has sought to isolate the 'toxic debts' in the banking system through its asset protection scheme.

And perhaps most important of all the pound has been allowed to devalue by 25 per cent. But despite these confidence building steps, the Treasury is wary of saying that the worst is over.

The rose-tinted economic forecasts of last year have given way to a new realism.
The view in Whitehall is that the Nationwide index, which rose by 0.9 per cent in March, was probably a one-month aberration, and was out of line anyway with the Halifax index which fell by 1.9 per cent in the same month. 

Similarly, although the G20 did lift international confidence most of the measures agreed on will take time to deliver. Meanwhile, the crisis in Eastern Europe becomes worse.

It must also be noted that the downturn has left fiscal policy in the Anglo-Saxon economies looking in very poor condition.

Over the medium term, huge fiscal deficits will have to be tackled and this could place a dampener on recovery.

So although it may be comforting for all of us to latch onto green shoots it could be a very long time before they turn into sturdy, healthy plants.

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