YOU never know what equity markets are thinking, which sometimes creates curious juxtapositions when good news is followed by falling markets or markets rally in the face of apparently bad news.

An example of this occurred on the day General Motors filed for bankruptcy when the US stock market rose by 2.5%.

This was, on the face of it, either peculiar or an affront, given the hardship that was likely to result for the employees and suppliers of the ailing giant.

The reason for the apparently incongruous reaction was partly that the move had been widely expected since the global auto industry went into intensive care in late 2008. The evaporation of consumer credit hit car sales for six and the advent of global recession has kept consumers’ hands in their pockets, willing to eke another year out of the old banger, rather than buy the latest model.

It had also been clear for some years that the US car makers would have to restructure in order to be able to supply cars that people wanted, without losing money in the process. Furthermore, the shrunken production base of today was unable to shoulder the pension and health care benefits promised to workers in more prosperous times.

In the markets’ eyes, there was a limit to how long the companies could continue as loss-makers – so a bankruptcy process that would enable the factories to emerge as profitable businesses with a future was better than continuing the gradual decline seen in recent decades.

All parties (including the employees’ representatives in the US) appear to have concluded that compromise today was better than collapse tomorrow.

Of course, the loss of further employment in the teeth of a recession where job losses have already been heavy is very unwelcome. It increases the importance of the authorities continuing their efforts to boost the economy. While the green shoots that some are discerning in parts of the economy remain tender, they must be sheltered and fed.

The jury is out as to whether the green shoots are well-rooted or whether the economy is simply deteriorating less rapidly than over the turn of the year. However, there is more conviction in the tone of recent reports, with signs that UK house prices have at least paused in their falling trend this spring, and that economic growth forecasts, while weak, are not being downgraded further.

Most recently, the pace of the jobs shake-out in the US was one- third less in May than expected. If these signs of improvement can be sustained (which means no complacency from policymakers – the battle against recession is not yet over) there is a good chance that they will become self-reinforcing.

As the economy improves, consumers become more willing to spend, companies to invest and the banks to lend.

Although bad times are here, for sure, irrational fear has been replaced by rational but nonetheless sober judgment.

Although a recovery in output may start in the UK and elsewhere by the end of 2009, as predicted in the last Budget, it will be held back by the inexorable mathematics of debt repayment. We must now learn the lessons of the past and seek growth without the false “bonus” of living beyond our means, both as a nation and as consumers, that primed the engine of the economy before the credit crunch.

ANDREW BELL,

Head of Research,

Rensburg Sheppards