Growth estimates in the second quarter of 2010 were revised up during August. The new figures now show the UK growing at its fastest quarterly rate since the first three months of 2001. The rise was lead by the construction industry which grew at 8.8% signalling a stronger than expected recovery in housing.

Meanwhile the US has reduced its growth estimates in the second quarter. The USA grew at an annualised rate of just 1.6%. This has added to concerns of a double dip recession hitting the world economy in 2011. The double dip recession has been bandied around in the media a lot over the last year since the end of the recession in 2009. Double dip recessions have happened in the past, most notably in 1932 and in 1982.

However both of these double dip recessions were caused by a rise in interest rates. With inflation at low levels and many economies experiencing deflation interest rates are likely to be very low for a considerable period of time.

It is far more likely that what we are experiencing is a “soft landing”. Typically after a severe recession, the economy will experience rapid growth as companies build back inventories that were whittled down during the recession. As the economy returns to its trend level, economic growth slows down.

With unemployment levels at 10% in most developed countries it is unlikely we will see a continued rapid economic expansion for several years.

Consumers who are worried about their jobs are likely to save more and spend less. With credit markets still frozen, companies are unable to expand rapidly to take advantage of new opportunities, further hampering growth.

With interest rates low and economic growth weak the best place to put your funds is typically in bonds. However with stock markets dropping, more than $1 trillion dollars have flowed into bond markets over the last 6 weeks. Yields have now been squeezed to the point that it is difficult to envisage making any gains in bonds in the short to medium term.

Commodities’ price growth has stalled over the last year. With weaker demand from China and the US and inflation in the near term under control, commodities are likely to continue to be weak into 2011.

Most equities have fallen since April. The only area in equities which seems to be generating a return at the moment is the dividend payers. Large companies are currently cash rich, this means dividends are more secure. With such low interest rates in banks many people are moving in to very high quality dividend paying equities.

Companies such Scottish and Southern Energy, National Grid and Vodafone have dividend yields of around 6%. Scottish and Southern Energy have increased their dividends by 10% per annum over the last 10 years. This increase in dividends means that their share price continues to grow, giving you a steady income stream of around 6% as well as capital appreciation to protect your investment against inflation.

Impact on Currency

The US dollar has stayed strong on a basis of expected strong economic growth. That assumption seems to be overly optimistic now. With the US financing a massive deficit, the dollar is likely to decline across 2011.

Sterling still looks promising. Stronger growth figures in the UK as well as some of the best dividend yields in the world make the UK look more attractive. A relatively high inflation figure of 3% has kept Sterling low, however inflation is expected to drop in the second half of the year which could see Sterling appreciate significantly.

The Euro seems to be relatively balanced at the moment and with weak EU growth figures we can expect to see little change in the Euro.

The Yen has been driven up massively over the last few months. However with the biggest budget deficit in history and a government trying desperately to deflate the currency, this is not likely to continue.