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The preliminary reading on US GDP for Q1 2012 has come in at an annualised rate 2.2%. The GDP figure is subject to revision as more data becomes available, but the initial value is poorer than the 2.5% growth that many experts had anticipated. The economy is at least still moving in the right direction, but the mediocre performance of the world’s largest economy is symptomatic of things elsewhere in the developed world as Friday’s piece underlined. The results would suggest that the US economy is slowing down, despite better than expected employment data so far this year.

The US Q1 GDP figure did contain some crumbs of comfort though. The domestic market in the USA is responsible for some 70% of the GDP figure and consumer spending did increase in the quarter, growing by 2.9% on an annualised basis – the best performance since Q4 2010. Another ray of hope was data from the home construction industry which took advantage of a relatively mild winter and grew at its best rate since Q2 2010. The US car industry also turned in a decent performance, building on a 0.47% contribution in Q4 2011 to add 1.12% this time.

On the negative side of the balance, the level of inventory investment fell for the first time since Q4 2009, contracting by 2.1%, a marked change of fortune from the 5.2% growth seen in the last quarter. A fall in government spending on defence also weakened the economic performance. It was reduced by a further 8.1% (annualised) following on from a 12.1% reduction in the previous quarter. Sentiment is predicting that the Federal Reserve will maintain a steady-as-she-goes policy and that a third round of quantitative easing is not yet on the cards.

The world’s major markets were trading lower on Monday having ended last week largely stronger. The Dow Jones Industrial Average at 13228 (up 1.5%); the Nasdaq composite stood at 3069.2 (up 2.3%); the FTSE 100 was at 5777.1 (up 0.1%); the Dax stood at 6801.3 (up 0.76%); the Cac 40 ended the week at 3266.3 (up 2.4%); and the Nikkei stood at 9520.9 (down 0.42%).

At the ECB fixing point on Monday, EUR:USD stood at 1.3214, weaker by 0.1%. It weakened by 0.8% against the Yen; EUR:JPY 105.85. The Euro weakened by 0.3% against Sterling – GBP:EUR stood at 1.2301. The Euro wasn’t helped by the news – as expected- that the Spanish economy had fallen into recession with a Q1 contraction of 0.3%.

The Global Financial Crisis has been the deepest period of economic downturn since the Great Depression of the 1930s. That economic cycle arguably lasted until the Second World War – nearly a decade. By comparison, we have had it easy this time around. In general, economics is a cyclical beast with “booms” followed by “busts”, but neither the up- nor the down- cycle needs to be that dramatic. A recession, by definition, is always followed by a period of recovery in which investment and employment grow relatively strongly. The Global Financial Crisis has been atypical because the recovery phase (with a few notable exceptions in the emerging economies and Australia) has been particularly anaemic.

Concerns about the entire capitalist system of financing remain; the ability of nations to honour their financial obligations has been cast into doubt – most significantly with the European Sovereign Debt crisis; this has led to a shortage of liquidity for business to use for expansion into the recovery period. The nature of the original crisis was such that major powers feared the entire global financial system could collapse. They tackled this problem by pumping cash into the system to shore up banks and other financial institutions and some sectors of critical industries. This action raised concerns on the minds of leading economists who styled the early recovery of consisting of “froth over substance”. They argued that because the recovery was stimulus-dependent, it was likely that a second recession would follow before recovery from the main event was complete. This was the so-called “double dip” recession scenario.

A technical recession is defined as two consecutive quarters in which the economy contracts. Data just released by Britain’s Office of National Statistics shows that the UK has fallen back into recession with Q1 2012 seeing a 0.2% contraction, following on from a 0.3% contraction in Q4 2011. A sharp decline in construction activity has been blamed for the figures – output fell by 3%. Many analysts had said it was a coin toss as to whether the UK economy would contract or manage weak growth this quarter. Most people expect the economy to return to growth as early as next quarter. The data is preliminary and subject to at least two revisions.

The UK joins the ranks of Japan, Spain, Ireland, Greece, Germany and Italy to name but a few to have fallen back into recession. So far this year, economic indicators have been mixed and have painted a rosier picture than many expected as the year dawned. The IMF recently upgraded its forecasts for global growth by 0.2% to 3.5% and the ECB has stated that there is no credit-crunch within the Eurozone; for the moment at least. Hopefully, the double-dip recession will be short-lived and followed by a more robust, sustained recovery this time: for that to happen, investors need to find new reserves of confidence, of course.

At the ECB fixing point on Wednesday, EUR:USD stood at 1.3206; stronger by 0.3% over yesterday’s close. It strengthened by 0.4% against the Yen; EUR:JPY 107.35. The Euro also gained 0.5% against Sterling on news of the Q1 data; GBP:EUR stood at 1.2204.

French President Nicolas Sarkozy earned the dubious honour of being the first incumbent not to win the first electoral round of the French Presidential campaign in the 55 year history of the fifth republic. Sarkozy came second to Francois Hollande of the Socialist party (27.1 to 28.6%), but lives to fight on in the second and decisive round to be held on May 6th. Whilst Sarkozy has made it clear that the only way for France to clear its own deficit and debt problems is through austerity measures; a position he has echoed at Eurozone meetings, his Socialist opponent is in favour of spending his way to growth. Amongst other policies, Mr Hollande is calling for certain workers to be allowed to retire at 60 rather than 62; a rise in the minimum working wage; a tax hike for big corporations and any individuals earning over €1 million; and the creation of 60000 teaching jobs. The far right National Front candidate, Marine Le Pen, won 18% of the Presidential vote; the question of how the voting shares from the National Front and other parties will distribute between the two remaining candidates will obviously be critical. Sarkozy has wasted no time in trying to win over votes from the National Front – the question is will they find voting for him any less distasteful than voting for a left-wing candidate? Market jitters are likely to continue for the next few weeks whilst the political future of France is in the balance. France has the second largest economy within the Eurozone, after Germany.

Market reaction to the French presidential vote and other political news was gloomy. A recent Markit survey shows that manufacturing output has fallen in the Eurozone and parliament’s failure to agree an austerity budget has provoked the resignation of the government. The Purchasing Manager’s Index (PMI) reveals that manufacturing activity in Germany almost fell to a three-year low in April with a value of 46.3. A wider picture of PMI values for the wider Eurozone region also showed a strong contraction. As a consequence of this, the Dax (Germany) lost 3.3%; the FTSE (UK) lost 2.1%; the Cac 40 (France) fell 2.7% by mid-afternoon in Europe. The Dow Jones and Nasdaq have both opened lower in the US by 1.2 and 1.4% respectively.

As might be expected, the renewed anxiety has done the Euro no favours at all. At the ECB fixing point on Monday, EUR:USD stood at 1.3131, weaker by 0.5%. It weakened by 1.2% against the Yen; EUR:JPY 106.51. The Euro weakened by 0.3% against Sterling – GBP:EUR stood at 1.2246. Sentiment towards the Euro could hardly have been helped by the fact that the Bank of Spain is calling Q1 economic performance for the nation as showing a contraction of 0.4% which means that Spain has fallen back into recession. The official reading on the Spanish economy will be published at the end of April.

The International Monetary fund has revised its global growth forecast upwards by 0.2% from 3.3 to 3.5%. This was due to several factors which have been more positive than many analysts had predicted at the end of last year. The improved employment situation in the USA over the last few months has seen unemployment edge downwards to 8.2% of the workforce (still an unusually high level, but the best figure since 2009). Over in Europe, the acute phase of the sovereign debt crisis seems to have passed with the provision of the second IMF/EU bailout for Greece – for the time being, at least.

The IMF suggested that the contraction of the Spanish economy will be worse than they predicted and expect it will contract by a further 0.2% from 1.6 to 1.8%. Spain is having to pay higher rates to borrow short-term money (3.1% on 18-month bonds) and will be organising a bond auction on Thursday. At the moment, yields on ten-year bonds are trading above 6% on the secondary market. The auction will be a critical indicator as to whether the sovereign debt crisis has been laid to rest or is merely on hold. The behaviour of the ECB will be under close scrutiny to see if it will intercede to buy Spanish debt to force the yield down – a course of action that it has not had to take recently. The IMF identified a further flare-up of the sovereign debt crisis as a significant down-side risk to the global economy.

The IMF believes that the Eurozone will contract this year, but by 0.3% rather than 0.5%. However, they have tipped the UK economy to grow by more than forecast with growth projected at 0.8% rather than 0.6%. It expects China and Brazil to post growth of 5.7 and 5.5%, respectively.

The impact of austerity measures to reduce deficits and public debt, whilst applauded by the IMF, may need to be dialled back somewhat in order to foster economic growth. The organisation suggested that the fiscal shortfall could be balanced by temporary hikes in taxation, to offset the effect of reduced savings from the austerity programmes. Clearly, what is really needed is an understanding from the investment community that nations need to borrow to stimulate growth whilst following an agreed policy to pay down deficits and debt over the longer term. The problem with this, of course, is that the market is not a cohesive entity.

At the ECB fixing point on Wednesday, EUR:USD stood at 1.3093, weaker by 0.3% over yesterday’s close. It strengthened by 0.6% against the Yen; EUR:JPY 106.64. The Euro weakened by 0.5% against Sterling – GBP:EUR stood at 1.2208.

On Friday, ratings agency Standard and Poor’s (S & P) confirmed its faith in the UK economy by maintaining the nation’s AAA credit rating. S & P expects that the coalition government ought to be able to implement most of its planned austerity measures which are designed to get the UK deficit under control. In the agency’s opinion, the UK economy is “wealthy, open and diversified” and it has confirmed that the rating has a “stable” outlook (meaning it is unlikely to change within the next two years). This evaluation is bullish in comparison to the positions taken by the other two leading ratings agencies, Fitch and Moody’s both of whom maintained the UK’s AAA rating, but put the country on a negative outlook. The more pessimistic evaluation is over doubts on growth prospects and public debt concerns.

In an upbeat statement of assessment, S & P commented: “In our view, the UK has a wealthy, open, and diversified economy, supported by a well-established political system and macroeconomic policy framework, which can react quickly to economic challenges. We expect economic policy to focus on closing the fiscal gap, and we forecast the government’s net debt burden to peak in 2013 [at about 87% of GDP].”

The views of ratings agencies are critical in determining the yields that need to be paid on government bonds in order to attract investors; a country that enjoys a top rating will pay less than a nation with poorer credit rating scores.

On the stock market front, last week saw a fresh bout of sustained pessimism with all of the major indices closing the week below their closing points of the previous week. In the USA, the Dow Jones Industrial Average fell back by 1.6% to 12849.6; the Nasdaq composite index slipped by 2.3% to close the week at 3011.3 points. On this side of the pond, the FTSE contracted by 1.3% closing at 5651.8 points; the Xetra Dax ended down by 2.8% at 6583.9 points; the CAC 40 was off by 3.9% falling to 3189.1 points. In Japan, the Nikkei 225 also fell back, shedding 0.52% and ending the session at 9638 points. Brent crude (May delivery) fell 1.3% to $121.8 per barrel and gold strengthened by 2.2% to $1666.5 per ounce.

At the ECB fixing point on Monday, EUR:USD stood at 1.3024, weaker by 0.9%. It weakened by 1.2% against the Yen; EUR:JPY 105.18. The Euro weakened by 0.3% against Sterling – GBP:EUR stood at 1.2155. Fresh concerns about Spain’s abilities to meet its obligations have sent the yield on Spanish bonds higher – the 10-year bond is attracting a yield of 6.1% ahead of further debt auctions this week and the jitters are sending the Euro lower.

Most of the major world markets have been on vacation for the Easter period, so reaction to employment data which emerged towards the end of last week did not have an impact until European markets opened on Tuesday.

Most analysts had been expecting that the US economy would have produced about 200000 new jobs in March, but in reality just 60% of this number materialised. Although the creation of 120000 new jobs in the current economic climate is no small feat, the figure disappointed the markets, triggering significant falls when the markets opened. The Cac 40 fell by 3% and both the FTSE 100 and the Xetra Dax fell by 2.5%. The banking sector was hard hit with French banks Societe General and Bank Paribas declining by 6.2 and 5.7% respectively; UK banks Barclays and Lloyds fell by 5.9 and 5% respectively; and Germany’s Commerzbank taking a 5.9% hit. In the USA, the Dow Jones Industrial average fell by 1.7%, its worst single day decline of the year to date.

However, by today a rally had set in and markets recovered part of their earlier losses with gains of between 0.6 and 1%. The renewed optimism (if we can call it that) has been attributed to a strong performance from Aluminium producer Alcoa. Alcoa itself saw a 10% hike in the value of its shares. Taken as a whole, market performance has seen its best quarterly performance since 1998, so the post Easter slump may just have been taking a short “time out”.

A fresh round of jitters over the vexed subject of sovereign debt has started over concerns that Madrid may be unable to meet its obligations, eventually. Nervousness has sent the yield on 10-year up to 5.99%. The yield is still well below the 7% threshold which most analysts agree is the point at which sovereign borrowing costs become unsustainable. The Spanish government recently embarked on ambitious austerity measures to reduce expenditure by €27 billion and reduce the deficit towards a level agreed by the wider EU. Spain is gripped by the highest level of unemployment within the European Union at 23.6%. This means that Spain has to deal with reduced revenue in the form of income tax and increased expenditure in social security benefits.

Demand for both Italian and Spanish bonds has been strong, but yields have been pushed up.

At the ECB fixing point, EUR:USD stood at 1.3131, stronger by 0.1% over Tuesday’s close. It weakened by 0.3% against the Yen; EUR:JPY 106.18. The Euro weakened by 0.1% against Sterling – GBP:EUR stood at 1.2107.