Schroders chief economist Keith Wade believes we're heading for a W-shaped recovery and that interest rates are unlikely to start rising from their historic lows until the middle of next year.

Mr. Wade visited the Bermuda office of the global broker and asset manager last week to speak to investors about the prospects for the global economy.

During the market turbulence sparked last year by a near meltdown of the global financial system, Mr. Wade said many companies had overreacted, by slashing jobs and inventory.

In recent months they have been replenishing that inventory and that has helped to drive a recovery.

The rebound that has seen the S&P 500 gain more than 50 percent since hitting its March bottom is likely to continue into the first quarter of next year, he added, but the market recovery is destined to run out of steam soon after.

"The outlook we are looking at is W-shaped," Mr. Wade said. "We are on the middle upleg of the W and that will continue for a bit longer, I think."

Companies who made huge cuts in inventory early this year will continue to rebuild it through the fourth quarter, Mr. Wade believes, thus boosting economic activity.

"In companies and markets, many people overreacted to fears of another Great Depression," Mr. Wade said. "As the markets plunged, companies cut their output and employment. In the US they were very aggressive in cutting jobs.

"As a result, productivity has improved and that has been the foundation for an improvement in profits. So I think the V part of the W will go into the first quarter of next year."

Consumer weakness, rising commodity prices and weak credit were factors likely to slow down the economy next year, Mr. Wade said.

"Unemployment is high and the consumer is not in a position to start spending again," Mr. Wade added.

Commodity prices, which have plunged over the past 15 months, will no longer be so helpful to the recovery. "The headline rate of inflation has been negative in the US, because oil has come down so far, but that effect is just beginning to unwind," Mr. Wade said.

"Credit growth is still very weak. People are not going out and borrowing — and that makes sense because the level of debt is still very high and house prices have come down 20 percent and equities are still well down from their peaks.

"Consumers are saving more, borrowing less and paying down debt. That's what they should be doing. The problem is that if everybody saves, and nobody's buying things, then you get a recession."

Interest rates have been at record lows in the US and the UK and Mr. Wade expects them to remain so long into 2010.

"Unemployment will keep going up," he said. "In past cycles, the US Federal Reserve has not started raising interest rates until after the unemployment rate has peaked.

"We believe that rates will not start going up until June next year — and it could be later than that. The very strong message from the G20 last week was 'no exit yet'."

Many fear that the huge injection of money into economies by central banks around the world will lead to raging inflation. Mr. Wade believed that will not be a problem for at least a couple of years.

The large amount of spare capacity in the global economy should lead to greater competition, keeping prices and wages low. Mr. Wade said some Schroders economic models forecast that inflation would dip further and that deflation was a possibility.

"A lot of the money that the central banks have put in has not gone into the real economy," Mr. Wade said. "It's not being lent out. Much of that money is staying in the banks and some is finding its way onto the markets."

He added that historically, policymakers have tended to keep monetary policy too loose for too long, rather than risk tightening it up too early.

Institutional investors, who make up most of Schroders' clientele, were not receiving the kind of returns they have been used to on fixed-income investments, such as US Treasury bonds.

But Mr. Wade saw opportunities for good yields in investment-grade corporate paper. Schroders also believes that emerging economy currencies are likely to see their values move higher against the dollar, possibly next year.

Emerging economy markets were likely to provide most of the world's economic growth in the coming years, he added, and could benefit from a surge in liquidity, as investors pile into equities. But this created the possibility of the creation of an asset bubble that could burst further down the line.