US growth to remain prior to rate hike

The US economy and markets will continue to show strong growth until interest rates are raised, probably next year, warns INVESCO group chief economist John Greenwood.

The US economy and markets will continue to show strong growth until interest rates are raised, probably next year, warns INVESCO group chief economist John Greenwood.

"The US CPI is gradually creeping up, which means the Federal Reserve will not be able to relax," Greenwood said at a recent briefing in Melbourne.

"It will be the middle of next year, when inflationary pointers come into the market, which will see the Feds moving rates upwards."

INVESCO already is taking a cautionary line, although it predicts 3-4 per cent US growth continuing throughout this year.

While Europe is enjoying an upturn in business confidence, the UK has slowed down, despite an easing of interest rates. Retail sales also have slowed , and Greenwood is predicting a soft landing for domestic demand.

The problem child of world economies is Japan as it runs out of fiscal options to restart the economy. The recent upturn is only a temporary blip, Greenwood says.

The Japanese budget deficit as a percentage of GDP is now below 10 per cent and Japanese government debt has exceed GDP for the first time.

"Japan has to do something about its monetary policy," Greenwood warns. "It has been too tight and you cannot expect that to lead to Japanese investment spend-ing picking up."

INVESCO, which manages about $440 billion around the world, is underweight in its Japanese investments. Greenwood says it is going to be a long time before that economy shows real improvement.

For Australia, this means a longer period of depressed commodity prices, which is reflected in more bad news for resources stocks.

While INVESCO is more optimistic on Asia, there are concerns about China. Al-though devaluation of China's currency is on the cards, Greenwood believes two events will delay the move until much later this year - China will join the World Trade Organisation and authorities will wait until after the 50th anniver-sary of the October revolution celebrations before devaluation occurs.