Why is the FTSE not in freefall?

“Official: Housing Crash on the Way” headlined London’s Evening Standard tonight after the unwitting disclosure of Caroline Flint’s cabinet briefing paper which admitted that UK house prices will fall by least 5% this year and possibly more.

It’s been a dire day for economic statistics. Housebuilder Redrow reported reservations down 50% so far this year while the Royal Institute of Chartered Surveyors confirmed what we all knew that property prices are officially falling. According to RICS, confidence in the housing market is at its lowest for 30 years.

To make matters worse, the price of oil continues to surge upwards, reaching $115 a barrel. It stood at $28 just five years ago. This is now working its way into the wider economy with official inflation figures showing a surprise 0.5% jump in just one month. Bread and other foodstuffs have seen annual increases of nearly 30%. Of course it could be a blip, but with prices rising and the economy slowing, economists have started talking about the S-word again – Stagflation.

The downturn has been with us for at least six months, ever since the fallout of the sub prime scandal started working its way through the banking system taking out Northern Rock as a UK casualty. The Government has compounded matters further with their foolish tax changes. The 10p tax may have angered the masses but it has been the treatment of the non-doms that has unnerved business confidence. In short, business no longer trusts Labour and as a consequence, some businesses are threatening to relocate outside the UK tax system.

Yet despite these stories of economic gloom, the FTSE 100 has been remarkably resilient, although admittedly rather erratic. Today, it closed down 8 points to 6211. While that’s still down from its high of 6600 in July 2007, it is significantly higher than the 5400 it slumped to in March this year. Indeed, in the past eight weeks it has made a remarkable recovery.

It rather begs the question then, why aren’t the dreadful economic figures being reflected in the FTSE? It either suggests that the City is a damn sight more confident about Britain’s economic prospects than Fleet Street or investors have misjudged it big time.