Global equity markets have fallen by 6 per cent since the end of April, and have now given back all of their gains for 2011. After appearing immune to higher oil prices and the global economic slowdown for quite a while, investor complacency has disappeared in the past couple of weeks, and stockmarkets have fallen fairly sharply.

In my opinion, this drop has been triggered by the realisation that policy-makers around the world are no longer in any condition to rescue the global economy from a further slowdown, should that occur. Economies, and therefore markets, are currently flying without an automatic safety net from either fiscal or monetary policy.  And that brings new risks, compared to the situation which has been in place for most of the period since the 2009.

Last week, Martin Wolf drew international attention to the work of Professor Sinn of the German IFO Institute, who has made a series of alarming claims about the build-up of Target2 imbalances within the European System of Central Banks. Professor Sinn focused on the fact that the Bundesbank is now in credit to other European central banks to the tune of €325bn, with the offsetting debits being held by the central banks of troubled peripheral economies (which Professor Sinn calls the GIPS, an acronym which I prefer to the PIGS).

Sinn also claimed that the provision of German credit to the GIPS had effectively sucked lending capability out of the German banks, thus holding back the German economic recovery. This has triggered an intense debate about whether Germany is at risk from the potential failure of these debts, and whether the ECB has engaged in a “stealth bailout” of the GIPS. (For latecomers to the debate, see Paul Krugman, Tracy Alloway, Olaf Storbeck and Geoffrey Smith.)

Most of the key data on global economic activity for the month of May have been published in the past few days, and they have certainly added to concerns about the strength of the recovery from the Great Recession. The speed and extent of the decline in the manufacturing growth has been unusually severe, especially in the US, where the ISM business survey suffered its ninth largest monthly decline in its entire history, which extends back to 1948. In this earlier blog, I argued that policy makers in the US might be “out of ammo” if the economy headed towards a double dip recession. But I also said that that was not yet the most likely out-turn. Here is my take on what recent data in the US and elsewhere are telling us about the recovery.