Global fundamentals look set to strengthen in 2011 as the world’s economy starts to grow at a steady although slow pace, according to the Legal & General investment outlook for the next year. Growth in the developed markets will rally whilst the emerging world may slow down, said LGIM’s economist Tim Drayson.

“Growth rates should be around long-term trend levels across the developed world next year. Monetary policy is likely to remain exceptionally loose as fiscal policy tightens to varying degrees. The emerging economies have begun to slow as global trade growth has eased. Next year, long-standing tensions over trade imbalances and exchange rate policies could escalate,” said Drayson.

In regards to regional differences it is in the US that the picture looks the bleakest long term. On the positive side, if quantitative easing measures put into place by the Federal Reserve can sustain asset prices, consumers may begin spending more, leading to increased activity later in the year, said the outlook. In the long term however Drayson acknowledged that the US is “abusing [its] reserve currency status,” and that “US fiscal policy is on an unsustainable path.”

“Exiting QE is likely to be messy and the US remains under pressure to address debt levels not dissimilar to several European countries already in crisis,” said Drayson.

These developments are not seen to be supportive for government bonds in the US or UK. “Some point next year should herald the start of a multi-year bear market in US government debt. We have major concerns around the US' willingness to tackle its budget deficits, potential for an abrupt slowing of overseas buying of Treasuries and the Fed’s apparent preference for inflation above, rather than below, its implicit target,” said Drayson.

“The expansion of QE in the US is likely to boost global commodity prices, keep the dollar weak against other currencies and  amplify already strong capital flows into emerging Asia,” said Drayson. Inevitably it is the fear of asset price bubbles and inflation that will push the emerging regions to faster exchange rate appreciation and further rate hikes.

Meanwhile in the UK growth is expected to slow sharply at the start of 2011 as VAT rises to 20 per cent and the government cuts spending levels. “If growth falters in the UK, the Bank of England could turn towards providing additional QE to keep the recovery going,” said Drayson.