Don't stamp out success by rushing economic recovery efforts

'Rising optimism means rising bond yields which are pushing up mortgage rates – the irony of which will not be lost on both the Federal Reserve and the Bank of England, which are still trying to hold yields down,' say analysts at research house Fathom Consulting.

Little to gain
For business the picture is even gloomier. There is little evidence that they gained much from the fall in borrowing costs that has now been rudely terminated. The interbank lending rate, Libor, fell sharply from its peak as the Bank of England cut rates and pumped money into the economy. However, the benchmark three-month rate is still hovering at around 1.25% – 75 basis points above the Bank of England's base rate – when in normal times the two are almost in line.

A special survey by the Bank of Englandís regional agents in June found that more than 80% of companies said external finance, including bank finance and trade credit insurance, had become more expensive and harder to obtain over the past year. This was echoed by the Confederation of British Industry (CBI). Its May survey of credit conditions showed that just over half of companies that had secured new or renewed credit lines reported a rise in charges, compared with just 10% reporting a cut. This was only a marginal improvement from its February survey, carried out before the Bank cut base rate to 0.5%, when 57% reported a rise in borrowing costs.

'Evidence of a loosening in corporate credit conditions has been limited at best,' says CBI chief economist Ian McCafferty.

At the same time, sterling has started to regain much of the ground it lost after it emerged that the economy was heading for a nasty recession. Since hitting a trough below $1.40 in March, sterling has jumped by almost 18% against the dollar by mid-June and by almost 12% against a basket of its main trading partners' currencies. Much of the boost came after the National Institute for Economic and Social Research declared that UK output had risen in April and May. This boosted hopes that, on 24 July, the Office for National Statistics would reveal that the economy had grown in Q2 2009 for the first time since the winter of 2008.

The cruel irony is that a return to growth for the UK economy will have been driven by these very same factors that are now rapidly unwinding. Falling commodity prices, a weaker sterling and a slump in mortgage rates combined to give a boost to both consumersí wallets and exportersí price list. Now they are all climbing again, economic recovery could itself reverse.

'The gain in competitiveness is melting away,' says Stephen Lewis, chief economist at Monument Securities with reference to sterling's climb. 'Some anecdotal reports have suggested that the spending of many households has been underpinned, so far in the economic downswing, as a result of falling mortgage rates and declining inflation pressures. These benefits are unlikely to extend much further.'

Financial investors may be right in calling an end to the recession. The danger is that by responding so quickly to hopes of a return to economic boom, they risk trampling on the very green shoots that sent them on a buying spree in the first place.