CONFUSION between better-than-expected data and good data – and there is a huge distinction between the two – may have made traders over-optimistic about the pace of recovery. But the markets crashed back down to earth last week as investors started to doubt whether there had been any green shoots at all.<br /><br />To be fair, most of the better-than-expected data that has been seen over recent weeks can be seen as a sign that the downturn could be moderating or even that a turning point has been reached. However, remember that this recession has many points of weakness and any economic recovery in the coming quarters could easily be undermined.<br /><br />This month’s publication on the findings of the US stress tests had been taken as a source of optimism by the market, and indeed the news may have been worse. But it would be unwise to view the banks as now having a clean bill of health. Even if the US banks do manage to raise the $75bn needed to appease the regulators, the International Monetary Fund estimates there could be more bad news ahead. According to the IMF, US banks may still be facing $500bn of writedowns over the next two years. And in mainland Europe – not the UK – banks could be facing as much as $875bn.<br /><br />Recent Eurozone economic data has also been disappointing. Last week, German first-quarter GDP registered a much worse than expected fall of 6.7 per cent year-on-year and the German government is forecasting GDP growth to fall by 6 per cent this year. Despite some better-than-expected news recently, in the form of a rise in German factory orders, the GDP data was a harsh reminder of the severity of the present recession. It seems inevitable that the level of bad debts will rise in such an environment.<br /><br /><strong>TRADING PARTNER<br /></strong>The fortunes of the German economy are of huge importance to everyone else in Europe – it is, after all, the largest trading partner of many other EU countries. The German government is expecting the federal deficit to rise to €90bn next year and, like the UK and the US, the increase in the budget can be linked to recession and a rise in spending aimed at stabilising the economy. Many consumers will be benefiting from government spending and from lower interest rates but the majority of German taxpayers, like their UK counterparts, fear a heavy increase in their tax burden in the coming years, which will affect their spending plans.<br /><br />But this is not the worst constraint on spending: unemployment and the fear of unemployment can be expected to hit household consumption well into 2010. There are presently 3.46m people unemployed in Germany. Even in the UK, 2.2m people are out of work and forecasts that this could top 3m are not uncommon. If consumption remains constrained then economic activity will continue to suffer.<br /><br /><strong>DEPRESSING FALL<br /></strong>Talk emerged in the early part of last week that UK first quarter GDP growth, which registered a depressing fall of 1.9 per cent quarter-on-quarter, may be revised a little higher. This optimism followed a better than expected industrial production report for March.<br /><br />But any positive sentiment vanished on Wednesday when the Bank of England released its Inflation Report. The Bank projected that there was an outside risk that UK growth could reach as low as -6 per cent this year before turning positive in the first three months of 2010. The Bank also said that, while there were solid reasons for supposing a recovery in 12 months, the process of getting back to a normal path may take longer than previously forecast. At present it is not at all certain whether the UK is facing a V, U or even a W shaped recovery.<br /><br />The BoE also estimates that Consumer Price Inflation will be 1.2 per cent in two years time, well below its 2 per cent target. Based on this set of projections, there is little chance that the BoE will be hiking interest rates any time soon and it is foreseeable that rates could remain at 0.5 per cent throughout 2010. This was not welcomed by sterling investors.<br /><br />It promises to be a long and choppy ride before the global economic recovery is firmly established. Following sterling’s move higher against the euro during April, euro-sterling has traded sideways in May and after last week’s projections from the BoE, sterling bulls will remain cautious for now. Similarly, would-be investors in other risk trades may prefer to stay sidelined. Until there is firm evidence that the global economy is bottoming, safe-haven assets such as the dollar and the yen will remain in favour.