Let's celebrate a better second quarter

Allister Heath
IT is now clear that the first quarter of this year was utterly, devastatingly bad for the British economy. Revised figures yesterday showed that it shrank by 2.4 per cent between 1 January and 31 March. At an annualised rate, that was a drop of 10 per cent, the sort of implosion last seen during the Great Depression. Fortunately, the economy has since stabilised and may even have started growing very slightly again in May and June. But it remains the case that the UK&rsquo;s national income fell by 4.9 per cent year on year in the first quarter, and that we have had a narrow escape from something much, much worse.<br /><br />In addition to the raw numbers, there is another reason why the pain has been so intense: the entirety of the recession has been focused on the private sector, led by an absolute collapse in construction, a severe contraction in manufacturing and a big drop in services. So given that close to half the economy is made up by state spending, and that &ndash; astonishingly &ndash; government expenditure rose in the first quarter, the collapse in private sector output will have been much higher. Households&rsquo; disposable income fell by 2.4 per cent.<br /><br />But it is clear that things are improving, both in the real economy and also in the equity markets, for which yesterday marked the end of the second quarter. The difference between the first quarter and the second was the difference between night and day, even though the markets have paused for breath over the past month as risk appetite has begun to show signs of waning.<br /><br />The numbers are truly striking, even if the UK did a little less well than its main competitors. The FTSE 100 is up a healthy 8.2 percent on the quarter, and has gained 22.8 percent since touching a six-year low on 9 March, a terrible day etched in every equity investor&rsquo;s memories. As far as I can tell, this is its best performance since the final quarter of 2003.<br /><br />Even though the American economy is struggling more than Britain&rsquo;s, its stock market performance has been better. The Dow Jones Industrial Average rose 11 per cent during the second quarter. It is the first quarterly gain for the Dow since the third quarter of 2007 and its biggest since the fourth quarter of 2003. The S&amp;P 500 is up 15 per cent in the second quarter, its best performance since the fourth quarter of 1998. The Nasdaq and Russell 2000 indices were both up by 20 per cent in the second quarter. The FTSEurofrst 300 index of European shares hit a low on 9 March, before rebounding 15.9 percent in the April to June period, making it the best quarter since the last three months of 1999 and the first positive quarter since mid-2007. It is up 31.7 percent since the March low, but remains down 48 percent from mid-2007.<br /><br />But most of this global rebound took place in April and May; investors have since lost a lot of their enthusiasm. Data over the summer will continue to confirm that the global recession is abating and in some cases ending &ndash; but investors should not count on anything other than a very weak recovery. Excessive optimism will only mean disappointment later in the year; and renewed worries about equities. But this wasn&rsquo;t meant to be a gloomy piece. There are plenty of problems &ndash; but we should all be celebrating the end of a much better second quarter.<br /><br />allister.heath@cityam.com