RECOVERY: Not so fast

There is a kind of positive feedback loop here, in which confidence about the economy boosts the stockmarket and a rising market helps restore economic sentiment . As strategists at Citigroup remark, the world seems to have moved from worrying about the Great Depression to talking about the Great Escape.

But how real is this shift? Not all the recent economic data have been positive. The June Empire State survey of manufacturing activity in New York showed a retreat. German export figures for April showed a 4.8% month-on-month fall. The latest figures for American and euro-zone industrial production showed similar dips. American raw domestic steel production is down 47% year on year; railway traffic in May was almost a quarter below its level of a year earlier. Bankers say that chief executives seem a lot less confident about the existence of “green shoots” than markets are.

The danger is that policymakers have done more to revive the financial markets than they have to shore up the real economy. Tim Lee of pi Economics thinks the authorities are simply inflating another bubble. The carry trade (borrowing in low-yielding currencies to invest in higher-yielding ones) has returned, as shown by the strength of the Australian dollar.

This bubble may start to deflate. Investors are already rediscovering their appetite for government bonds: the yield on ten-year Treasuries had drifted back from a peak of 3.93% on June 10th to 3.67% a week later. Investors may be starting to realise that, even if the biggest falls in output have passed, the outlook for 2010 is still likely to be sluggish.