Greenwood: Printing money is no quick fix

Invesco's John Greenwood has warned further QE in the UK is unlikely to lead to a rebound in economic growth as he said there was "no quick fix" to the country's economic woes.

Speaking ahead of today's announcement the Bank of England will begin a further £75bn round of QE, the chief economist said the economic outlook has "darkened" in recent months and warned further asset purchasing will not lead to a rapid recovery.

"In the light of the Japanese experience of 2001-2005 and the recent US experience with QE, we should not expect the strategy to lead to any rapid recovery in the economy.

"Increasing the government's indebtedness, or persuading non-financial companies to borrow more would ultimately only weaken the economy, not strengthen it. Sadly there is no quick fix, and we must expect a prolonged period of debt work-out," he said.

In his latest quarterly outlook Greenwood said it is not clear if fiscal or monetary activism will achieve much in alleviating the country's economic woes, especially considering the weak pound and above target inflation.

In Europe, he fears Germany, or "the eurozone powerhouse" is teetering on the brink of recession, and Italy and Spain are both "too big to fail but also too big to be saved by the €440bn EFSF."

"Italy and Spain risk losing access to the debt markets. The only solution is to have a very large, credible lender of last resort. The ECB, reluctant to depart from the principle of sterilising all sovereign bond purchases, has essentially ruled itself out. It requires a separate entity that can easily absorb all of Italy's borrowing needs as well as those of Spain, Greece, Portugal, Ireland and possibly Belgium too.

"In the words of Hank Paulson, it requires a "big bazooka" with access to trillions of euros. Nothing else will restore credibility. Over the next few weeks the eurozone leaders must therefore commit to backstop the eurozone with a facility that is several times larger than the current EFSF.

"If they do not, or if they hesitate, some states may lose the ability to refinance their debts and theeurozone and many other leading economies will be plunged into another deep, protracted recession."

Greenwood also criticised Operation Twist in the US, calling it a "highly dubious strategy" as will not stimulate markets like QE, could be counteracted by private portfolio adjustments and depress banks' interest margins through its impact on mortgage and other lending rates.

The economist had a few positive notes to make on the emerging economies which he said are in better shape having been through balance sheet recessions in the 1990s and early 2000s but inflation has reached "uncomfortable levels".

"Also, emerging economies remain critically dependent on exports to the developed world, and this implies an unavoidable slowdown in their growth trajectories not only in the next three months, but in the year ahead. Despite a few small tentative steps towards decoupling, little was ever achieved. The emerging economies remain tied to the fate of their developed trading partners."