Liquidity to drive WWW-shaped global growth

Comment by Stuart Thomson, economist at Ignis Asset Management

"Hands up those who believe that the UK economy contracted by 0.4% during the third quarter.

Apart from a few deluded statisticians at the ONS, there will be few takers, but the torrent of abuse from investment banking economists has been excessive.

"Investment and inventories are extremely low and should recover in the fourth and first quarters helped by additional quantitative easing from the Bank of England.

We believe that the GDP data tips the balance in favour of an additional GBP25bn worth of quantitative easing, which extends the Bank's purchase program through until the end of the year.

The prospective rise in inflation, however, temporary precludes further QE over the next six months and if as we expect the Fed begins tightening early in the second quarter, then the Bank will not be far behind.

"The Fed is contemplating a change in its rhetoric according to press reports.

This will drop the phrase that rates are on hold for an extended period of time, which is the first phase in premature tightening of policy.

The catalyst for this verbal dexterity will be the 3% plus rise in preliminary third quarter GDP.

The first tightening is not expected to take place until the second quarter of 2010.

Lending, employment and wage pressures remain extremely subdued.

However, liquidity is likely to accelerate activity over the next few months, and the ebb and flow of central bank liquidity over the next few years will drive the www-shaped pattern of global growth.

"Additional central bank liquidity over the next few months is bullish for risk appetite, but for the first time this year it is possible to project negative expected returns to risk assets on a one year horizon as central banks gradually withdraw liquidity over this period.

This suggests that financial market volatility will increase over this period.

For Stuart's full commentary please see his blog at www.ratesviews.com.

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