Is the economic nightmare nearing its end or will the glimmers of light seen in the east prove to be a false dawn? By the end of the summer, the answer should be clearer. The financial markets are convinced that the worst is over. Though doubts have resurfaced in recent weeks, share prices have rebounded dramatically since March. This has helped to boost business and consumer confidence, both of which are vital ingredients for economic recovery.

There are already signs of real recovery in Asia, where industrial production grew very strongly in the three months to May, admittedly after a terrifying slump. This has helped to fuel a sharp rally in commodities, including metals and oil.

The optimists believe that the US and European economies are now turning the corner, with analysts at Barclays Capital predicting that the rest of the year will show surprisingly strong growth. If true, this could bring another surge in financial markets, which are still only reflecting the avoidance of Armageddon rather than the likelihood of a healthy recovery.

This is still a minority view, however. Most pundits are sceptical that the recovery in Asia is much more than a “dead cat bounce”. Production fell so sharply because of a rapid run down in stocks, which can only last so long before there is some sort of recovery in orders. Output has also been boosted by government measures, such as the car scrappage schemes around the world, which have a limited life.

The big worry is that America, which was widely expected to be first out of the downturn, has yet to rebound. Until US house prices stop falling and US consumers start spending, hopes of global recovery will remain just that – hopes.

In Britain, the economy may already have bottomed and it is likely that in the next three months there will be growth of some sort. More jobs will still be lost and more businesses will go under, but fewer than most economists predicted in March.

Job losses have slowed significantly, with the May figure the lowest for ten months, and the CBI recently forecast that unemployment would peak at three million, rather than the 3.3 million it originally predicted.

Some company advisers say that banks are not pulling the plug on as many businesses as they expected, perhaps because of the intense political pressure, particularly on Royal Bank of Scotland and Lloyds, now part-owned by the taxpayer.

There are also growing signs that the housing market is stabilising. But there are plenty of reasons to fear that the flickers of life may be snuffed out. The rebound in the oil price and the recovery in sterling will act as a drag, while most economists say that there is simply not enough lending being provided by the fragile banking system to sustain a strong recovery.

The one place where the good times seem to have returned already is in the City. Volatile markets, reduced competition and the gush of government money flooding the system have brought fat profits in areas such as foreign exchange dealing. There have also been fat fees for helping companies to raise money, particularly from new share issues. Unless the markets crack over the summer, which many bankers think quite possible, the outlook is good. The result is that big bonuses are back, fuelling the anger about top pay generally. The summer will have further confrontations over pay between shareholders and companies such as Cable & Wireless and Home Retail Group, the owner of Argos.

Recovery in the City has prompted overblown fears that the efforts to reform the banking system will run into the sand. In the next couple of weeks, the Government and the Conservatives will present competing plans for the redesign of the regulatory architecture, with much interest focused on the future role of the Bank of England in banking regulation.

There will be nervous eyes on Brussels, which has proposed reforms that could hit London’s hedge funds and private equity firms. There are also fears that Neelie Kroes, the Competition Commissioner, could force Lloyds and RBS to sell off assets in return for the state aid they have received.

Few bankers expect a rush of corporate deals, despite the recent flurry of all-share offers in recent weeks, such as Xstrata’s tilt at Anglo American. But if the market holds up we could see some flotations in September.

The fate of Vauxhall should be decided soon, as General Motors negotiates the sale of its European arm, and there should be news on the vacancies at the top of a number of big companies including J Sainsbury, Lloyds and ITV.

British Airways and its staff face a long, hot summer of industrial confrontation that could lead to strike action. Holidaymakers who have not opted for “staycations” will be watching nervously.

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