Thomson, discussing the economic context in which he will run Ignis’ new Absolute Return Government Bond Fund, says the Bank of England will have a window to raise rates in February 2012 as inflationary pressures weaken and real income begins to increase once again.
However, he says “the most likely time for a rate rise is probably the autumn of 2013. 2012 will be a difficult time – we can expect more QE towards the end of the year in the UK”.
Thomson believes that both the UK and the US will have to resort to further quantitative easing as growth disappoints. In the UK, he says “the productive potential of the economy is probably about half what the Office for Budget Responsibility is expecting”.
He notes that the OBR’s current forecasts are heavily reliant on consumers taking on yet more debt, increasing debt to income ratios from a current level of 160% to 173% by 2015.
The economist also believes that inflationary fears have been overdone, suggesting that QE measures will not be inflationary while banks are continuing to deleverage rather than circulating money back into the system. “As inflation falls back rapidly, central banks will once again be in a position to start supporting their economies”, he adds.
Thomson points to research showing that the average length of a period of economic expansion in the US, once economic recoveries propped up by balance sheet expansion have been stripped out, is just 33 months. Accordingly, he says the US “will be living on borrowed time by the end of this year”.
“I can confidently predict QE3 in both the US and the UK”, he says, but warns that each new injection of liquidity will have less of an impact than the last, according to a law of diminishing marginal returns that is exemplified by the past two decades of Japanese economic policy.
