Fiscal consolidation is not just for the euro-zone - substantial belt-tightening is coming for most of the developed world writes David Foster, Managing Director with RBS Coutts (Cayman) Limited.

As it starts to bite, adding to the headwinds of consumer and banking-sector deleveraging, we believe 2011 global growth will slow by more than the consensus expects.  

Although the chances of a US “doubledip” recession have risen in recent weeks, it remains a low-probability alternative to our central view of sub-par growth. Nevertheless, the transition from growth driven by policy stimulus and inventory rebuilding to a sustained private-sector recovery will not be a smooth process, and equity market volatility will have regular spikes.

A sustained period of sub-par growth, with inflation risks clearly on the downside, will keep interest rates at extremely low levels throughout next year. Government bond yields will remain under downward pressure and the yield curve will continue to flatten. The low-rate environment will drive yield hungry investors into higher-yielding assets like corporate bonds and dividend-paying equities, pushing up their value.

Equities are unlikely to power ahead until the economic recovery is far more mature. Nevertheless, even our below consensus 2011 growth forecast is still consistent with positive equity returns over the next year. Within equities, we continue to favour emerging markets, which should benefit from stronger growth and fiscally healthier consumers and governments.