Britain's economy grew at its slowest annual rate for 12 years in the second quarter of the year, according to figures published last week.

The figures from the Office for National Statistics coincided with more bad news from the high street and the release of the Confederation of British Industry's weakest retail survey for 22 years.

With this doom and gloom as a backdrop, why then is the UK stock market so buoyant?

The real backdrop for the FTSE 100 is not the UK economy, but the global economy - at least as far as the outlook for sales and earnings are concerned.

It is estimated that around 68 per cent of sales for the non-financial constituents of the FTSE 100 are derived outside of the UK.

While consensus forecasts for GDP growth in the UK and the Eurozone have been revised downwards for this year and next, little has changed in the outlook for the US economy, and hence the global economy.

As for Asia, the consensus forecasts for GDP growth throughout the region have actually been revised up for this year, partly on the strength of the improving outlook for Japan.

Higher oil prices are proving to be a more permanent feature of the overall investment picture than expected, but the adverse impact is not yet apparent in the consensus call on global growth.

Meanwhile, the consensus estimates for corporate earnings for the major equity markets are still being revised up.

The strength in oil and metal prices, like copper and gold, has meant that any downgrading in the earnings estimates outside the resource sector, notably consumer and service cyclicals, has been more than offset by the upgrading of the earnings estimates for energy and mining companies.

This has been especially good for the UK equity market, as not only does the UK have an above average weighting in resources, but the sectors also account for nearly a quarter of the market, following the recent listing of Royal Dutch Shell.

The more interesting development, however, is that equity markets that do not have lots of resource stocks have been doing well too and, indeed, even better than those which have.

In the Eurozone, the weighting of resource stocks is far less than it is in the UK, and still the Dow Jones Euro Stocks Index has been outperforming the FTSE 100. Japan has next to no weighting in resource stocks, yet the equity market has leapt ahead of its peers to become the top performing major market in the year to date.

Also, in Japan's case, the banks, which still represent a sizeable share of the market (some 11.5 per cent), have been moving particularly well.

This is in contrast to their behaviour in the UK and the US. The Japanese banks are potentially big beneficiaries of the reforms intended for postal savings and, over the past months, they, along with all the insurance companies, have moved rapidly ahead of the market.

The blame for the slowdown in UK growth can be laid at the door of the property market. The feel good factor of rising prices has disappeared, and the realism of lower disposable incomes to service the rising cost of living has set in.

* For investment advice contact Anthony Platts on 01642 608855.

Published: 04/10/2005