Can the UK economy reach ‘escape velocity’?

According to three of the country’s top economists, the UK economy is close to reaching ‘escape velocity’, having turned an important corner.

This should allow the UK economic growth to accelerate during the coming months.

‘Escape velocity’ describes the stage where economic growth is self-sustaining.

One of the economists, former Bank of England deputy governor Sir John Gieve, believes that economic growth could quite swiftly return to 2.5% or higher.

This is certainly an upbeat assessment. It could have interesting implications for investment markets.

We expect to hear next week from new Bank of England governor Mark Carney about whether the Bank will pre-commit to a lengthy period of low interest rates, perhaps through until 2015.

A combination of sustainable economic growth and continued monetary easing is likely to be good for both equities and bonds. Investors will however fear that economic growth will encourage an end to quantitative easing, with interest rates being raised as well, which could quickly damage investor confidence.

We have already seen how global investors ‘wobbled’ when the US Federal Reserve hinted at tapering their own programme of quantitative easing.

As things stand, current market valuations appear to rely quite heavily on quantitative easing and the transition from this to self-sustaining economic growth could be quite painful for investors.

Economic figures released in the coming months along with statements from the Bank of England and other central banks could prove to be very interesting for investors.

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